What is cash back & how do cash back credit cards work?

There are plenty of credit cards out there—and many that offer various rewards. If you’re looking for a simple way to earn money on purchases you’re already making, a cash back credit card could be right for you. 

But how do cash back credit cards work, and where do you start? Before you apply, learn about the different types of cash back cards, how to redeem cash back and the additional benefits cash back cards could offer.

Key takeaways

  • When you use a cash back credit card, you earn a percentage of what you spend.
  • Cash back rewards can often be redeemed for cash or a statement credit, among other options.
  • There are generally three categories of cash back cards: flat rate, tiered and rotating.

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What is cash back on a credit card?

Cash back is one of many credit card rewards card issuers may offer. The idea behind cash back on a credit card is pretty simple: When you use your card, you earn back a percentage of what you spend. And depending on how you use your card, those rewards could add up quickly. It isn’t free money, but it can be a nice perk.

How does cash back work?

Cash back generally works by rewarding a portion of your spending back to you to redeem as cash or statement credits, among other options. 

But the way cash back rewards work can vary depending on the card and the issuer. 

For cards that earn cash back on different categories, card issuers rely on a four-digit number called a merchant category code. These codes are assigned to each credit card transaction and help issuers identify which purchases qualify toward earning rewards.

Types of cash back cards

Generally, there are three categories of cash back cards: flat rate, tiered and rotating. Your rewards will vary depending on the issuer and which card you have, but here’s a quick overview:

Flat-rate cash back cards

With flat-rate cash back cards, you earn the same percentage rate on every purchase you make with your credit card. So whether you’re buying gas, groceries or anything else, you’ll earn the same percentage of cash back every time. 

The Capital One Quicksilver and QuicksilverOne cards are two examples of flat-rate cash back cards. They both offer unlimited 1.5% cash back on every purchase, every day.

Tiered-category cash back cards

Tiered-category cards—sometimes called bonus-category cards—let you earn different levels of cash back within multiple spending categories. Higher-tier rewards percentages are usually on select bonus categories. Then purchases outside of the select bonus categories generally earn rewards at a flat rate. 

For example, the Capital One Savor card offers 4% cash back on dining, entertainment and popular streaming services, 3% at grocery stores1 and 1% on all other purchases.

SavorOne has similar rewards: 3% cash back on dining, entertainment, popular streaming services and grocery stores1, and 1% on all other purchases.

Plus, you can redeem rewards for travel or earn unlimited 5% cash back on hotels and rental cars booked through Capital One Travel with Savor and SavorOne.

Rotating-category cash back cards

Rotating cash back cards offer rewards for different spending categories throughout the year. These rotating categories will typically earn a higher rate than other purchases. Purchases that don’t fall into these bonus categories are typically rewarded with a flat cash back rate. 

Credit card issuers may determine categories that change regularly. For example, you may earn rewards on dining during one quarter and on gas during the next. Keep in mind, you might have to activate your bonus categories each time they change to start earning.

Some cards may even let you choose your rewards categories from a list of eligible options, like dining, grocery stores, gas stations and travel. So if you plan to use your credit card primarily for gas, you can select that category and be strategic with your spending.

Ways to redeem cash back rewards

There are plenty of ways to redeem cash back rewards. Issuers might let you redeem cash back through: 

  • Online shopping: Some cards may let you put your rewards toward future purchases. For example, Capital One lets you use your rewards to shop online with PayPal and at Amazon.com.2
  • Gift cards: Some issuers let you redeem your cash back rewards in the form of gift cards to popular retailers, restaurants and more.
  • Statement credits: You might be able to apply your cash back rewards directly to your credit card’s balance as a statement credit.
  • Checks or direct deposits: Some cards let you redeem your cash back rewards in the form of a check or a direct deposit to your checking or savings account. 
  • Other options: Some card issuers may give you other cash back redemption options, like donating your rewards to charity or using your rewards to cover all or part of a past purchase. 

Keep in mind that how you can redeem your cash back rewards can vary from card to card and issuer to issuer. Check your card’s terms and conditions closely to better understand when and how you can redeem your rewards.

Benefits of cash back credit cards

Earning cash back rewards can be a great advantage to having a credit card. But cash back cards may offer more than just their rewards potential. 

Some cash back cards may offer introductory perks, including:

  • Early spend bonus: With this type of promotion, you’re generally required to spend a certain amount within the first few months of opening the card. Once you reach the specified amount, you could get the bonus on top of your regular cash back earnings.
  • Low or 0% introductory APR: This promotion could be helpful if you want to make a larger purchase. You’ll typically have more time to pay off your purchase while paying only minimal—or no—interest.

Cash back credit cards can also offer many of the same benefits as other credit cards. That can include features like unauthorized charge protection and digital tools to help you keep an eye on your finances. And over time, with responsible use of your card, you can build—or rebuild—your credit and improve your credit scores.

What to know before applying for a cash back credit card

Beyond the rewards themselves, there are a few things to consider before you apply for a cash back card—or any credit card, really:

  • Terms, conditions and fees comparisons: How you earn and redeem cash back rewards is important. But it’s also a good idea to take a look at things like interest rates and annual fees to decide whether a particular cash back card is right for you. Looking at rates, rewards and fees can give you a good starting point to compare cards and find the one that fits your needs.
  • Rewards redemption: Make sure you understand how long, and under what circumstances, your rewards can be used. For example, with Capital One, your rewards are yours for the life of the account. There’s no limit to how much you can earn, and they don’t expire. Plus, it’s good to remember that the value of the cash back you’ve earned could be outweighed if you revolve a balance and accrue interest. Paying off your balance before you’re charged interest is a good way to make sure you get the most value from your rewards.
  • Application requirements: Credit card companies consider many factors when deciding whether to approve an applicant for a credit card. And that might include things like your credit scores
  • Credit impact: If you decide to apply for a credit card, including a cash back card, be sure you understand how that could affect your credit. If your credit application involves a hard inquiry, your credit score could take a temporary hit. And applying for multiple credit cards during a short period could send negative signals about your finances, according to the Consumer Financial Protection Bureau.
  • Responsible use: Personal responsibility and credit go hand in hand. So before you start making plans for your rewards, be sure you know things like when your bill will be due each month and where you can find your minimum payment.

Cash back credit cards in a nutshell

Cash back is one way you can get rewards on credit card purchases. With different ways to earn and redeem cash back rewards, chances are there’s a cash back card that fits your needs.

Ready to start earning cash back? Capital One offers several simple and rewarding cash back credit card options. If you’re approved, you could start earning unlimited cash back on all your qualifying credit card purchases. And who doesn’t want to be rewarded for the things they’re already buying?

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