Credit cards come in many different varieties, and they offer different perks and benefits to incentivize their users. The biggest selling points for many credit cards are their cashback rewards, which let you earn back money on your purchases.
But how exactly does cash back work? Learn more so you can choose a cashback credit card wisely and make the most of your rewards.
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What is cash back?
Cash back is one of three major types of rewards programs offered by credit cards. The other two are credit card miles and credit card points.
Cash back is the most direct form of reward. Essentially, when you buy something with a cashback credit card, you get a certain percentage of your purchase back as cash (hence the name “cash back”).
How does cash back work?
As mentioned, cashback credit cards reward you with a certain amount of money for making purchases with the card.
However, cashback rewards differ in terms of:
- How much money you’ll get back
- What purchases you’re rewarded for
The details depend on which type of reward your card comes with.
Types of cashback rewards
Here are the most common forms of cash back on credit cards:
Flat rate
Flat-rate cashback programs are incredibly common and are often coupled with one or more of the other forms of cash back.
Flat rate cash back is when you earn a certain percent of your purchase back every time you use your credit card, regardless of what you buy. For example, if a cashback credit card has a flat rewards rate of 1% and you spend $1,000 in a month, you’ll earn $10 in cash back that month.
Fixed categories
Fixed categories, also called tiered categories, are when you earn different amounts of cash back based on what you’re buying.
For example, a fixed category cashback program may offer:
- 3% back on gas purchases
- 2% back on groceries
- 1% back on dining
As you can see, the amount you earn depends on what you’re using your card to buy. Often, fixed category rewards are combined with a flat rate, so you’ll earn higher percentages in designated spending categories, then a flat rate (often between 1%–2%) on everything else.
Beware that many fixed category rewards programs have caps on earnings, after which they may switch you to a flat rate. For example, a card may offer 3% back on gas for the first $2,000 that you spend in a quarter, then offer you a flat 1% rate for gas purchases after you reach that threshold.
Rotating categories
Rotating-category cash back usually takes the most effort to manage, but can also yield the highest rewards. Rotating categories are similar to fixed categories, but which purchases earn higher rewards rates will change throughout the year.
For example, a rotating category cashback program may offer:
- 5% back on gas (Jan–Mar)
- 5% back on groceries (Apr–Jun)
- 5% on dining (Jul–Sep)
Like with fixed categories, this is usually coupled with a flat rate (e.g., 1% back on all other purchases) and has earning caps for each category period (which are often quarters, meaning there’s four of them in a year).
Bonus categories
Bonus categories allow you to earn cash back at a much higher rate on certain purchases throughout the year.
For example, a credit card may offer 10% cash back for gym or fitness purchases in the month of January.
Bonus categories often yield high rewards rates, but on fairly narrow categories and for shorter periods of time than rotating categories.
Alternately, some cashback credit cards may offer bonus cash back on purchases made with certain companies. For example, Capital One might offer 15% cash back on Lowe’s purchases (but only if the purchase is made through the Capital One app).
How to earn cash back
The simplest and most obvious way to earn cash back is to use your credit card to buy things. Additionally, cashback cards tend to offer other means of getting bonuses.
Here are all the ways you can earn cash back on a credit card:
- Use the card regularly: As mentioned, most cashback cards offer a flat rate of cash back for every time you use your credit card.
- Spend on cashback categories: If you have a cashback card with fixed or rotating rewards categories, make sure you strategically spend within those categories. For example, if you have a card that offers cash back on gas, always use that card at gas stations. However, you shouldn’t force yourself to spend where you otherwise wouldn’t just to get cash back. You’ll likely lose more money than you’ll earn this way.
- Get a welcome bonus: Many cashback credit cards advertise welcome bonuses for new cardholders. Usually, these come in the form of bonus rewards or cashback match (in which they double your cashback earnings at the end of a certain period, e.g., a year). Welcome bonuses are sometimes contingent on how much you spend after opening the card. For example, you may need to spend $3,000 in the first 3 months of card ownership to access the bonus cash.
- Refer a friend: Credit cards often offer referral bonuses. You can refer friends using a unique code and if they apply or get approved for the credit card, you get rewarded with bonus cash back.
- Reach a milestone: Different credit cards offer their own milestone rewards, in which you get cash back on a specific day or for hitting a certain threshold. A milestone might be spending a certain amount in a designated period of time, your cardholder anniversary, or even your birthday.
- Add an authorized user: Your cashback credit card may offer a cash bonus for adding an authorized user to your account. Additionally, the extra spending your authorized user does will help rack up cashback earnings. Be aware that you’re ultimately responsible for your authorized user’s spending on the card, so make sure they (or you) pay the card’s balance on time.
How to redeem cash back
Cash back can be redeemed in multiple ways, including as:
- A check
- Deposit into your bank account
- Statement credit (credit towards your outstanding balance)
- Gift cards
Some card issuers may require you to earn a certain amount of cash back before it can be redeemed, while others may allow you to redeem as much as you want at any time.
Can you get a cashback credit card with bad credit?
Most rewards cards, including cashback credit cards, are mainly available to borrowers with good or excellent credit.
You can still get a cashback credit card with bad credit or fair credit, but the lower your credit score is, the more limited your borrowing options will be. You’ll probably qualify for cards with less generous cashback rates than someone with a good credit score.
You may need to get a secured credit card if you’re a borrower with less-than-perfect credit looking for cashback rewards. For example, the Discover it® Secured credit card offers cash back at a rate of 1%–2% to even borrowers with limited or bad credit. The catch is that the card requires a security deposit of at least $200.
Improve your credit score to get more cash back
The best way to get more cash back from a credit card is to improve your credit score. The better credit you have, the more cards you can qualify for, including ones with generous cash back and other rewards.
Even raising your credit score from poor to fair could mean better cards and more cash back in your pocket.
