What is cash back? Cash back is a type of reward that can be earned when using rewards credit cards. Many credit card issuers have rewards programs that allow cardholders to earn cash back rewards when they make purchases with their credit cards.
Many popular cash back credit cards are available, but not every card has the same features, benefits, or rewards structure. Are you considering applying for a cash back credit card? Here’s what you need to know to choose your ideal credit card and maximize your cash back rewards.
What Is Cash Back?
Are you wondering what is cash back? Cash back is a reward that you can earn when you make purchases. Many rewards credit cards earn cash back when you swipe your credit card.
Some shopping loyalty programs and debit cards also earn cash back rewards, but this guide will focus on cash back credit card rewards. If you want to get rewarded for making everyday purchases, you can benefit from having a cash back card in your wallet.
How Cash Back Credit Cards Work
What is cash back on a credit card? When you make a purchase with your credit card, you'll earn a portion of the amount spent back. Some cashback cards earn cash back directly——like 2% cash back rewards. But some rewards credit cards earn points or miles.
Typically, points or miles can be redeemed for cash back or a statement credit — or in other ways, such as gift cards or travel. How you earn rewards and the amount of cash you earn depends on which credit card you have and your spending habits. Cash back credit cards can provide an excellent way to pay yourself back for regular spending.
Related: Check out our list of the best cash back credit cards
Flat-rate vs. Bonus Category Cash Back Cards
Are you considering getting a cash back credit card? Generally, you'll have two ways to earn cash rewards with this type of credit card:
Flat-rate rewards: Flat-rate cash back cards earn cash back at a fixed rate, regardless of the purchase category. A flat-rate 2% cash back card will yield you 2% back whether you're paying for dinner, filling up your gas tank, or going to the movies.
Bonus category rewards: Some cards earn cash back rewards at an elevated rate in select bonus categories. Purchases outside those categories earn cash back at a reduced rate. For example, a cash back credit card might earn 3% back on dining and travel purchases but only 1% on other spending.
Common Cash Back Categories
Are you considering getting a cash back card that earns bonus rewards in one or more popular purchase categories? The following spending categories are common bonus categories:
Dining
Some rewards cash back cards offer bonus rewards on restaurant spending. In most cases, takeout and food delivery service purchases qualify for dining rewards. It's common to see cash back rates of 3% or 3X points for restaurant rewards cards. The value of these rewards varies, but you can expect points to be worth around one cent a piece.
Grocery
Some cash back credit cards earn bonus rewards for grocery spending. It’s common to see cash back rates of around 3% to 4% or 3X to 4X points. Keep in mind that some cash back cards have spending caps, which could limit the rewards you earn on grocery spending. The value of these rewards varies, but you can expect points to be worth around one cent a piece.
Gas stations
Another popular cash back category is gas stations. This may be your ideal cash back card if you drive a lot for work or frequently take road trips. It's common to earn around 3% or 3X points on gas purchases. However, some cards offer more generous rates of up to 6% or 6X points —but you’ll likely pay an annual fee. You can generally expect a value of one cent a piece.
Travel
Another cash back purchase category is travel. It's worth noting that some credit cards like this only earn elevated cashback rewards on travel bookings made through a specific travel portal, like Citi Travel or Chase Travel. Cash back cards that offer travel rewards typically earn 3% to 5% cash back or 3X to 5X points. When redeemed for cash back rewards, you can expect a value of one cent per point.
Related: Check out our top picks for travel rewards credit cards
Rotating categories
Some cash back credit cards offer bonus rewards in rotating categories. Typically, these categories change every quarter. You might earn 3% cash back on gas and grocery purchases in one quarter, then 3% cash back on dining and travel purchases in the next quarter. If you have varied spending habits, this kind of rewards card may be ideal for your lifestyle.
How to Maximize Cash Back With Credit Cards: Expert Tips
Here are some expert tips to help you maximize the cash back you earn with credit cards:
Consider your spending habits when choosing a credit card
Not every cash back card will be right for you. Make sure you choose a credit card that aligns with your typical spending. If your top spending categories are groceries and dining, getting a cash back credit card that offers bonus rewards on travel isn't the best strategy.
Expert Intel: Mike Kern, founder of the free budgeting app, FreeBudget explains why your spending habits matter: “Spending habits can have a big impact on the effectiveness of your credit card and should be a primary factor in determining the card you choose.” Kern continues, “Some cards have higher cash back rates in select expense categories, so if you spend a lot in one or more purchase categories, take a look at some of those cards to optimize your spend.”
Pay attention to sign-up bonus offers
If you're planning to add a new credit card to your wallet, compare sign-up bonus offers. You can boost your rewards by earning a welcome bonus offer. You can earn a cash back bonus or bonus points if you meet the minimum spending requirements within the set timeframe. Earning a sign-up bonus is an excellent way to boost your rewards.
Expert Intel: Certified Financial Planner and personal finance writer Robin Hartill cautions, “Before you chase a big welcome bonus, make sure you can meet the requirements with your regular spending. If your planned spending isn’t enough to hit the threshold, choose a card with a smaller welcome offer that you can realistically hit with your regular expenses.”
Don’t overlook spending caps
Some cash back cards have spending caps — meaning you won't earn unlimited bonus rewards in select purchase categories. Once you reach the spending cap, you'll earn rewards at a lower rate. It's not uncommon for cash back cards with bonus rewards on gas and grocery purchases to have spending caps. Verifying whether a particular card has a spending cap can help you choose the right card for your spending patterns.
Consider a multi-card approach
Having more than one cash back credit card in your wallet can be beneficial, especially if your spending varies. For example, having a credit card that earns cash back in bonus rewards categories that match your top spending categories and a flat-rate rewards card that you use for other purchases outside those categories is an excellent way to maximize your earnings.
Expert Intel: Mike Kern, founder of the budgeting app FreeBudget, discusses how this can be helpful: "You should consider having multiple cash back cards if you spend significantly higher than average in one category like dining out or entertainment. If that's the case, I'd recommend having one card with a higher rate for that category and then using a different card for everything else to maximize your cash back."
Do your research before redeeming your earnings
Many cardholders redeem their cash back rewards for a check or as a statement credit. But this isn't always the best or only redemption option.
Some card issuers give cardholders multiple ways to redeem their rewards. For example, some cash back cards allow cardholders to book travel arrangements through a designated travel portal. You may get more value if you choose this option instead of cash back. To get the most from your rewards, explore all redemption options.
Frequently Asked Questions
Is Cash Back Free Money?
Earning cash back with a credit card is free if you never carry a balance. However, some cash back rewards credit cards charge an annual fee. You should review a credit card's features and benefits to decide if the annual fee is worth the cost and reward potential.
What Are the Disadvantages of Cash Back Credit Cards?
One disadvantage of cash back credit cards is that they typically have high APRs. However, you can avoid interest charges by paying your entire statement in full. Another disadvantage is that redeeming your rewards for cash back may provide less value than other rewards credit card options, like redeeming for travel with travel partners.
What Is 5% Cash Back on $100?
A credit card offering 5% cash back earns 5 cents back per $1 spent. If you spend $100 on eligible purchases with your card, you’ll earn $5 cash back. While this may not seem like a lot of money, $5 is much better than earning $0 with a credit card that doesn’t earn rewards.
