How do cash back credit cards work?

Credit card enthusiasts like myself are super passionate about credit card rewards of all shapes and sizes. We love transferable points like Chase Ultimate Rewards®, Amex Membership Rewards®, and Capital One miles because of the flexibility they afford — whether you want free airfare, hotel stays, rental cars, or an array of other things, transferable points are super valuable.

But you know what’s the most flexible of all? Straight up cash. You can use cash for airfare and hotel stays; you can use it for rental cars and cruises. Or you can use it for your electric bill or your rent payment or the oil change you keep putting off because you don’t feel like dropping a hundred bucks.

Cash is king, and it always will be. Unless you’ve got a burning desire to travel, you should be using cash back credit cards with regularity. Here’s why.

What are cash back credit cards?

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Cash back cards can be considered a gateway into the world of credit card rewards. They’re the perfect tool for someone who doesn’t have the time or the patience to learn how to maximize things like airline miles and hotel points.

So what is cash back? Put simply, it’s the most straightforward rewards system with easy-to-understand redemption options. Think of it as a small rebate on every single purchase you make. Depending on how often you swipe, you could find yourself with a healthy stash of savings without even trying.

Types of cash back cards

Not all cash back credit cards are created equal. You need a strong understanding of your spending habits before you apply for one of these cards if you want the maximum return.

Let’s look at the four genres that cash back cards fall under. And keep in mind that you can open more than one type!

1. Bonus categories

Many cash back credit cards offer bonus categories, from gas stations to restaurants to online retail purchases. Basically, they’re incentivizing you to use the card for those specific expenses.

For example, the Blue Cash Preferred® Card from American Express gives you the following return rates (while charging a $95 annual fee):

• 6% cash back at U.S. supermarkets (on up to $6,000 in spending, then 1%)
• 6% back on select U.S. streaming subscriptions
• 3% back at U.S. gas stations and on transit
• 1% back on all other purchases

As you can see, the card is downright spectacular for very specific purchases. A 6% return at supermarkets almost guarantees the card will capture your monthly grocery shopping. You could quite effortlessly receive $360 in cash back annually for that expense alone.

Shop around to find the cash back card that suits your lifestyle. You’ll likely find two or three options, which can bonus nearly every dollar you spend. It could certainly be worth opening them all — so long as you stay responsible with your credit card usage!

2. Rotating categories

Cash back credit cards that offer rotating bonus categories reward you handsomely for everyday purchases — but you’ve got to be on the ball for two reasons:

1. The categories change each quarter. You’ll have to periodically check the card’s bonus category schedule to keep on top of which purchases are currently bonused.
2. You’ll have to activate your card each quarter, or you won’t earn any bonus cash at all.

An example of a cash back card with rotating categories is the no-annual-fee Discover it® Cash Back card. It earns 5% cash back on up to $1,500 in spending in varying categories after you activate the card (then 1%). It earns 1% on all other purchases.

This year, the card has offered grocery stores, fitness clubs/gym memberships, gas stations, Target, restaurants, and PayPal as bonus categories. As you can see, super common expenses.

You just need the diligence to keep up with the bonus categories.

3. Customized categories

There’s a rare breed of cash back credit cards that will actually adapt to your spending to help you achieve bonus cash without all the mental horsepower.

There are a couple of angles these cards use to help you.

Choose your own categories

Just like the name suggests, these are cards that let you choose in which categories you want to earn your cash back.

An example is the Bank of America® Customized Cash Rewards Credit Card, which earns 3% cash back in one category of your choosing, each calendar month:

• Dining
• Gas
• Online shopping
• Drugstores
• Travel
• Home improvement/furnishings

If you know you’re going to spend a lot in dining this month and online shopping the next month, you can customize your categories accordingly.

Automatically selected categories

These are cards that analyze your shopping on your behalf, so that you don’t have to worry about manually picking each time.

An example is the Citi Custom Cash℠ Card, which gives you 5% cash back on up to $500 in spending for the category in which you spend most (then 1%) from the following list:

• Grocery stores
• Restaurants
• Gas stations
• Drugstores
• Select streaming
• Select travel
• Select transit
• Live entertainment
• Home improvement stores
• Fitness clubs

With this card, you don’t even have to choose your favorite category — the card will identify which category you’ve used the most and bonus it automatically.

4. Flat rate

If you want simplicity, a flat rate cash back card takes zero brain cells whatsoever to use. With it, you’ll earn the same amount of cash for every purchase, no matter what. There are no bonus categories for you to worry about.

But there’s a tradeoff: these cards often have lower earning rates than others. The best you’ll tend to do with these cards is 2% cash back on all purchases.

For example, the Citi® Double Cash Card gives you 1% cash back when making a purchase and another 1% when paying off that purchase — an effective 2% back on everything.

Don’t get me wrong, that’s a fair return. But with a bit of effort, you can net a whole bunch more (as you can see above).

Still, everyone should have a flat rate cash back card in their wallet. They’re great for purchases that don’t fall under a bonus category with any other card. Things like medical expenses and insurance payments are examples of payments that won’t fall under another credit card’s bonus category. That makes it a perfect candidate for a flat 2% cash back credit card.

How to redeem cash back

So how does cash back work? Each cash back credit card has varying rules, so we can’t cover them all. But that being said, there are generally just a few main ways to redeem your cash back.

Statement credits/check/direct deposit

When you’re ready to cash out your hard-earned rewards, you can usually request a check to be mailed to your house, a statement credit on your credit card, or a direct deposit into a bank account of your choice.

With one exception (which we’ll get to in a second), you should not consider redeeming your cash back any other way.

Note that some cash back credit cards require that you accrue a certain amount of cash back before you’re able to redeem it.

Gift cards/merchandise

Many credit cards will let you redeem your cash back via some sort of online portal for gift cards or merchandise. This is a bad idea for one very simple reason: you’re cheating yourself out of cash back when you do it.

If you want a Chili’s gift card, it’s better to simply buy it with your credit card and redeem cash back as a statement credit to offset that purchase. That way you’ll at least earn cash back for purchasing the gift card. If you redeem cash back for a gift card, you won’t earn rewards because you never made a purchase.

Travel

Some credit cards, such as those issued by Chase and Citi, offer an online travel portal where you can redeem your cash for airfare, hotels, rental cars, cruises, and more.

But there’s a secret you should know. Some cards that are marketed as “cash back” don’t actually earn cash. They earn points, which can be redeemed for huge value.

For example, the Chase Freedom Unlimited® is a “cash back” card that earns the following:

• 5% cash back for travel purchased through the Chase Travel Portal
• 3% cash back on dining and drugstore purchases
• 5% cash back for all other purchases

What the card actually earns are Chase Ultimate Rewards® points, which you can cash out at a rate of 1 cent per point. If you also hold a Chase Ultimate Rewards® card, such as the Chase Sapphire Preferred® Card, you can turn the rewards you earn with the Chase Freedom Unlimited® into airline miles and hotel points. You can often get a value of more than 2 cents per point when doing this — so if travel is one of your primary goals, this is the way to go.

What to look for in a cash back card

When you’re deciding on a cash back credit card, there are a few things to consider:

• Annual fee — The idea of paying an annual fee just for a tiny slab of plastic can be off-putting — scary, even. But these cards come with earning rates and ongoing benefits that can give you far more value than what you’re paying for them each year.
• APR — Some of the most generous 0% intro APR credit cards are also cash back credit cards. If this appeals to you, it may be worth sacrificing a higher earning rate for a longer 0% intro APR window. See our picks for the best 0% intro APR card options.
• Specific categories — If you’re a road warrior, you may value a cash back credit card with a high return on gas stations. If you’ve got a large family, you may want a card that offers a big bonus for spending at grocery stores and wholesale clubs. Identify your spending habits before making your choice.
• Sign-up bonus — Many cash back cards offer around $200 after meeting minimum spending requirements. If you can find one that offers more, it’s an excellent deal. See our picks for the best credit card sign-up bonuses.
• Personal or small business credit card — Small business cards often have even more generous welcome bonuses and earning rates than personal cards. You must have a for-profit venture to qualify for a small business card, but it doesn’t need to be a multi-million dollar enterprise. Even things like freelancing, driving for DoorDash or Uber, or babysitting can count as a small business. See our picks for the best business credit cards.

The bottom line

No matter your financial goals, cash back should be a part of your credit card strategy. They’re easy to use, the rewards are easy to redeem, and you’ve got 100% flexibility with them. You can use them to effectively discount your purchases; you can use it as a faux savings account and store it up for a special occasion each year; you can use it in tandem with travel rewards to pay for things that points won’t cover during a vacation, such as food or fun activities.

Just be sure to evaluate your spending so you don’t apply for a card that won’t serve your lifestyle.

Read more

• Best cash back credit cards
• How to get 5% back on everything you buy (or, almost everything)