An Overview of Cash Back Credit Cards: How Do They Work?

FT Contributor
A magnified dome clarifies the words "cash rewards" on a credit card that sits on top of a $100 bill.

Having a credit card that offers cash back can completely change the way you shop as a consumer. Using a cashback rewards card for the purchase of a big-ticket item lets you convert the cost into a more manageable charge, allowing you to afford more than you could have before. Ultimately, cashback credit cards can reward you for the type of spending that you would already do without them.  

If you’re new to the world of credit cards, this article will explain the benefits of cashback credit cards and how they work. Read on to decide if a cashback credit card is right for your personal financial strategy.

Table of Contents

What Is a Cash Back Rewards Card?

A cashback rewards card is a type of credit card that incentivizes you to make purchases by rewarding you with cash back. More specifically, cashback credit cards pay users a certain percentage of what they spend on a purchase, similar to a rebate. The more you use your credit card, the more cashback rewards you earn.

In most cases, consumers who use cashback credit cards can use their rewards towards their balance or redeem them in the form of direct deposits, gift cards, or discounted goods and services.

Types of Cash Back Rewards Cards

There are a few different types of cashback rewards cards: flat-rate, tiered and rotating-bonus-category. Each has its own unique benefits but choosing the one that is right for you will depend on your spending habits, budget, and lifestyle.

  1. Flat-rate rewards card:

Credit cards that offer the same percentage back on every purchase are considered flat-rate rewards cards. Generally, these cards allow you to earn unlimited cash back, but they often come with an annual fee. If you are someone who uses credit to pay for a majority of your purchases, you might benefit from a flat-rate rewards card, as you can earn on every purchase you make.

The only downside to flat-rate rewards cards is just that — the rate is flat. Some tiered rewards cards might offer you a higher rewards rate for certain purchases, such as groceries or travel. Before you decide on a card, assess where you spend the most money so that you can reap the most rewards.

  1. Tiered rewards card:

This is the most common type of rewards card, where users are offered 2% to 3% cashback on specific purchases, such as gas or restaurants. Generally, credit cardholders are awarded 1% cash back on any other type of purchase. If you typically spend a lot of money on gas, a gas rewards card could be right for you, allowing you to earn a significant amount on something you were already going to buy. Eventually, saving that 3% on gas could cut down on your total gas bill.

To get the most out of a tiered rewards card, it’s important to use the card on the purchases that offer the highest reward. Note that some tiered credit cards come with limits on what you can earn. This is especially true if the card doesn’t charge an annual fee.

  1. Rotating-bonus-category rewards card:

Some rewards cards will offer a specific bonus on different purchase categories during each quarter. For example, one quarter you might receive 5% cash back on all gas purchases, while during another quarter, you’ll receive 5% cash back on all entertainment purchases.

If you don’t mind keeping up with the current bonuses being offered by your rewards credit card, this program might be beneficial to you. Sometimes the categories can be specific, so it’s important to make sure you’re likely to buy within that category before signing up for a credit card. With rotating rewards, cash back is often capped within a period, so keep that in mind as well.

Examples of Cash Back Rewards Cards

Many credit card companies offer a variety of different rewards-based credit cards. Some of the most popular include:

  1. Flat-rate rewards:
    1. Capital One QuicksilverOne Cash Rewards Credit Card;
    2. Chase Freedom Unlimited;
  2. Tiered Rewards:
    1. Capital One Savor Cash Rewards Credit Card;
    2. Blue Cash Everyday Card from American Express;
  3. Rotating-Bonus-Category Rewards:
    1. Chase Freedom;
    2. Discover it Cash Back;

Can You Literally Get Cash Back With a Cash Back Card?

In most cases, you can receive cash back with a cashback card. Many credit card companies make it easy to redeem your rewards. Whether it’s a statement credit, a direct deposit to your account, or a check sent to you in the mail, most credit card companies offer the option of physically receiving cash back. Some rewards credit cards will also allow you to use your rewards points as you would cash for the purchase of gift cards, merchandise, or travel bookings.

While a majority of rewards credit card companies offer these options, not all do. It’s important to review your specific card’s terms and conditions to understand how you can redeem and use your rewards points.

How to Maximize Your Cash Back Rewards

Signing up for a rewards credit card means you’re looking to earn the most rewards so that you can take advantage of them. To maximize your cashback rewards, you should:

  1. Choose the right card: Think about where you spend the majority of your money. This will help determine the rewards card that’s right for you. If you frequent a particular store, a store credit card could help you save a significant amount every year. If you have to travel a lot for work, a gas rewards card might be better suited to your needs.
  2. Negotiate for better rewards: If you have an excellent credit score and provide value as a customer to the credit card company, you may be able to negotiate better rewards out of them.
  3. Pay bills with your credit card: This ensures you’re spending money on the card every month — and that you’ll generate rewards on something you were going to pay for anyway.
  4. Shop strategically: With an understanding of the purchases you’ll get the most rewards on, you’ll be able to make smart shopping decisions and ultimately reap more rewards. Use this cash back calculator to determine what your cash back might look like on any particular purchase.
  5. Use the card: If you sign up for a credit card just to get the sign-on bonus, that’s known as credit card churning and is frowned upon. Get more rewards by using the card on purchases you’ll be rewarded for.
  6. Beware of limits: Your credit card will have a spending limit. It’s important to be wary of this, especially when making big purchases.
  7. Pay your bills: Paying on time will allow you to maintain a positive credit score and prevent your rewards from being taken away. Bills that are paid late or not in full are at risk of a lowered credit card score.

From secured credit cards and beyond, there’s a rewards credit card that’s right for you. Consider your budget and spending habits before signing up for a card.

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