How Do Cash Back Credit Cards Work?

What Is a Cash Back Card?

A cash back credit card returns a portion of your spending to you as an incentive for making purchases. These cards can offer either flat-rate cash back—1.5% back on all purchases, for example—or higher rates of cash back in particular categories.

Example: If you spend a lot on groceries, you may choose a card that offers 3% cash back at your favorite grocery stores and 1% cash back on everything else.

Still other cards provide 5% or more cash back in categories that rotate quarterly.

All cash back credit cards let you redeem your rewards for cash, often via a check, statement credit, bank transfer or at checkout at certain stores. Some travel credit cards provide cash back as a rewards redemption option too—but you'll typically get more value from your points or miles if you use the rewards on travel instead of cash back.

Learn more: Different Types of Credit Cards

How Does Cash Back Work on Credit Cards?

With a cash back credit card, you'll earn cash rewards for each purchase. If your card offers a flat 2% cash back on purchases, you'll get $2 in rewards for every $100 you spend. Charging $1,500 in one statement cycle would lead to $30 in cash back that month. You can then choose to receive that $30 as a refund, known as a statement credit, or as a deposit to your bank account, among other redemption options.

Here are three ways these types of credit cards offer cash back:

Flat-Rate Cards

With a flat-rate cash back card, you earn the same amount of cash back on every purchase—often, 1% or 2%. Some cards also offer flat-rate rewards on payments, though the rewards rate is typically lower than the rate for purchases.

Flat-rate cards can be a good fit for people who don't want to spend a lot of time managing a credit card rewards program. It's easy to compare flat-rate cards to each other, and you'll know exactly how much you're earning on every purchase. Be sure to check whether the card has an annual fee or other fees that will offset the rewards you earn.

Bonus Categories or Tiered Rewards Cards

Some cash back cards offer different levels of rewards depending on where you use the card. For example, there are dining cards that give bonus cash back on take out and at restaurants, and gas cards with bonus cash back at gas stations.

Many cash back cards have several tiers, such as 2% cash back on dining and 3% on gas. There may also be a limit to the amount of bonus cash back you can earn each quarter or year. Generally, you can earn an unlimited 1% cash back on all non-bonus category purchases.

A tiered rewards card can be best when you tend to spend most of your money at particular types of retailers. They're also helpful if you have several rewards cards and can remember to pick the card that offers the most rewards on each purchase.

Rotating Rewards Cards

A rotating cash back rewards card is a type of tiered rewards card that has changing bonus categories. Generally, the categories change every three months.

These cards can be appealing because the limited-time bonus categories generally offer higher rates of cash back than other cash back card types. However, you can often earn bonus rewards only up to a certain amount—usually $1,500—in purchases each quarter. Also, you may not be able to choose the bonus categories.

A rotating rewards card could be a good option if you don't mind keeping track of the changing categories and potentially having to activate them to earn the bonus rewards. But it might not be as rewarding as a flat-rate or tiered card if it's your only credit card.

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How to Redeem Your Cash Back Rewards

You can redeem cash back rewards in several ways, including:

• Check
• Statement credit
• Direct deposit into your bank account
• Gift cards

Some card issuers offer additional options, such as letting you use your cash back rewards to book travel, donate to charity or make purchases online. Cash back cards may have a minimum balance requirement, typically $25, for cashing in your rewards.

What Credit Score Do You Need for a Cash Back Credit Card?

Rewards cards generally require a good or excellent credit score. Cards with the most stringent credit score requirements may offer large intro bonuses, high cash back rewards rates and additional cardholder perks.

There are options, however, for cardholders with bad credit, including secured cards that offer cash back rewards. But they may have lower rewards rates and fewer benefits.

Learn more: How to Use a Credit Card to Build Credit

Are Cash Back Credit Cards Worth It?

Deciding whether a cash back credit card is worth it depends on your credit history, planned usage and current financial situation. Here's when a cash back credit card could make sense for you:

• You can qualify for a high-value card. If you have good or excellent credit, chances are higher that you'll be eligible for a cash back card with meaningful benefits. But if you're working on rebuilding credit, a poor-credit unsecured card or a secured credit card with cash back rewards, even if they're low, may also be valuable to you. Make sure the issuer reports payment history to all three credit bureaus (Experian, TransUnion and Equifax) to get the most from the card's credit-building features.
• You'll make use of the card's rewards and redemption structure. Choose a card that aligns with your lifestyle: one that rewards you for dining if you often go to restaurants, or one that offers flat-rate cash back if you're not interested in keeping track of bonus categories.
• You plan to pay off your balance in full each month. Cash back cards do, in essence, reward you for spending. But maintaining a large balance on your card, and carrying it over from month to month, will cost you money in interest and could hurt your credit. Plan to pay your balance in full so interest charges don't erode the rewards you earn, and so you keep your credit utilization rate low.

Learn more: What Credit Card Should I Get?

How to Maximize Cash Back Rewards

You can take a few steps to maximize the cash back rewards you'll earn.

• Make use of your card's bonus categories. If you have a tiered or rotating rewards card, be intentional about which card you use for each purchase. Having a note on your phone or stickers on individual cards with their bonus categories can help.
• Keep an eye on extra earning opportunities. You may be eligible for limited-time offers to earn bonus cash back. Some cards, for example, provide double cash back on all purchases made in the first year of card ownership—which means it could be wise to make large purchases early on.
• Review the terms. Read over the credit card agreement to find out what doesn't count as an eligible purchase. For instance, you might not earn cash back if you use your credit card to buy lottery tickets or gift cards. You may also only earn cash back up to a maximum amount within certain categories. If you can choose between cash back and non-cash redemption options, review them closely to see which one will give you the best value.

Frequently Asked Questions

The Bottom Line

Cash back cards can lead to significant savings on everyday and major purchases, especially when you choose a card well-matched to your lifestyle. If you're unsure which card to get, start by getting matched with cards through Experian's card comparison tool. After logging in, you can get personalized offers based on your credit profile and the features you're looking for in a card—and explore options in side-by-side comparison with competitor cards.