How Do Cash-Back Credit Cards Work?

Cash-back credit cards earn a percentage of the price of a purchase and it adds up over time.
Jan 27, 2022

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Cash-back credit cards range from straightforward to complex, but each can be rewarding. Every time you use a cash-back credit card to make a qualifying purchase in store or online, it earns a percentage of the amount paid. That means if you spend $500 on a card that earns 1.5% cash back, you'll earn $7.50 back in rewards.

The cash back is typically issued at the end of the statement period or billing cycle and you can redeem it as a deposit into a bank account, statement credit, check, gift card, and potentially other options, depending on the credit card.

Cash-back credit cards come in different forms. Some credit cards earn a flat rate across all purchases, meaning they'll earn the same rewards rate on every purchase you make no matter the category. Other cash-back credit cards earn elevated rewards in some popular spending categories and a lower base rate on everything else.

Here’s an in-depth look at how cash-back credit cards work.

How cash back works on credit cards

When you use your cash-back credit card, you’re essentially earning pennies as a percentage of each purchase. It may not feel like much at first, but it adds up over time.

As long as your account is open and in good standing, you'll earn cash back on all eligible purchases. But some transactions don't qualify, including:

  • Cash advances.

  • Balance transfers.

  • Cash-like transactions (like purchases of foreign currency, money orders or cryptocurrency).

  • Lottery tickets.

  • Gambling-related purchases.

Purchases made through a third party like a digital wallet or wireless card reader may also not earn rewards if the technology can't provide enough information about the transaction to classify it as eligible for cash back.

Depending on the type of credit card, cash back may be easy to earn or you may have to jump through a few hoops to earn a better rate. Different credit cards issue cash back in the following ways:

A flat rate on all purchases

A flat-rate cash-back credit card can offer 1.5% or more in cash back on all purchases. It's typically the simplest way to earn cash back, but it may not be as straightforward on some cards. The $0-annual-fee Citi® Double Cash Card – 18 month BT offer, for example, earns 2% back on all purchases: 1% when you buy and 1% when you pay the bill. It's still fairly simple to earn cash back since the bill will be due.

Other cards like the $0-annual-fee Wells Fargo Active Cash® Card offer more straightforward cash back. This card earns an unlimited 2% cash back on all purchases.

Elevated rewards in common everyday categories

Other cash-back credit cards may offer higher rewards in certain categories — like gas, dining, streaming services or groceries, for example — and a base rewards rate of 1%. Some cards may also set a spending limit on the maximum amount you can earn in the highest-earning cash-back category. For instance, the $0-annual-fee Blue Cash Everyday® Card from American Express offers 3% back at U.S. supermarkets (on up to $6,000 spent per year), 2% back at U.S. gas stations and select U.S. department stores, and 1% back on all other eligible purchases. Terms apply.

Cash back in customized spending categories

Some cash-back credit cards earn rewards in a few high-spending categories from a list of several popular options that are likely to match your spending. The $0-annual-fee Bank of America® Customized Cash Rewards credit card offers 3% back on a category of your choice from a list of six options and 2% back on grocery stores and wholesale clubs for the first $2,500 of combined bonus category/grocery store/wholesale club spending per quarter. After hitting that threshold, you’ll earn 1% back. Purchases outside of these categories also earn 1% back. Spending categories include gas, online shopping, dining, travel, drugstores and home improvement and furnishings.

Another example is the $0-annual-fee Citi Custom Cash℠ Card, which earns 5% cash back on up to $500 spent in your highest spend category per billing cycle from a list of eligible options and 1% back on all other purchases. This card’s list of eligible reward categories is a bit longer and includes grocery stores, restaurants, gas stations, streaming services, drugstores, home improvement stores, fitness clubs, select travel, select transit and live entertainment.

Bonus cash back in rotating categories

A cash-back rate as high as 5% in common spending categories is possible to earn with a bit of maintenance. The $0-annual-fee Discover it® Cash Back offers 5% back in rotating quarterly categories on up to $1,500 in purchases each quarter with activation and 1% back on everything else. For the first quarter of 2022, bonus categories include grocery stores, fitness clubs and gym memberships. The categories on these cards can hit or miss since they may not always match your spending.

Your memory will have to be sharp with these options or you'll have to set reminders to stay on top of categories as they change. Forgetting to activate categories will leave you with a 1% base rate. It's also important to keep categories top of mind to strategically snag the higher rate on planned purchases.

Nerdy tip: Want to maximize your rewards? Try a coupling strategy: Use a 5% cash-back credit card for rotating bonus category purchases and a 2% cash-back credit card for different purchases.

Ways to redeem cash back

It’s important to read the terms and conditions to make the most of cash-back rewards. Some credit cards allow cash-back redemptions once you’ve earned a certain amount — typically $25. Other credit cards don’t impose a restriction.

Once you’re ready to redeem rewards, cash back can be used to fund a bank account, pad an emergency fund, cover a purchase or shave a few dollars off of the credit card bill. Redemption options vary by credit card, but they may include a deposit into an eligible bank account, a check, statement credit, a gift card, merchandise or purchases covered upon checking out at PayPal or Amazon. For the statement credit option, note that you can’t apply cash-back rewards toward the minimum amount due. For non-cash-back redemptions, read terms carefully to ensure rewards don't lose value.

Rewards may expire if you have an inactive account over a certain amount of months, depending on the credit card’s terms. But, beyond inactivity, rewards rarely have an expiration date.

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