What is Cash Back and How Does it Work? (2024)

4 Min Read | January 31, 2020

Cash back credit cards have become so popular that there are many to choose from. Learning how they work can help you find the options that are right for you.

This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

At-A-Glance

Cash back credit cards let you earn cash back on eligible purchases made with your card.

There are many types of cash back credit cards to choose from.

Cash back credit cards have become very popular.

If you’ve ever shopped for a credit card—or just seen a credit card advertisement—there’s a good chance you’ve heard about “cash back.” Not to be confused with asking to get cash back from the grocery store cashier after making a debit card purchase, offer money back, usually in the form of statement credit. Cash back credit cards can be an easy way to save a little bit on eligible everyday purchases.

Cash back cards are tremendously popular with American cardholders.1 This could be due to the simplicity and flexibility of cash rewards.

But what exactly is cash back and how does it work?

What is Cash Back and How Does it Work? (2)

What Is Cash Back?

Cash back is a credit card rewards benefit that refunds the cardholder a small percentage of each purchase made with the card. Percentages typically range between 1 and 1.5% for a flat rate cash back card,2 but can go as high as 5% or even 6% depending on the card issuer, type of card, and what you’re buying.

For example, some cards might offer flat-rate cash back bonuses of 1% on all eligible transactions. Other cards might offer a tiered structure, which could be, for example, 3% cash back on gas purchases, 2% on groceries, and 1% on all other purchases. Then there are cards that offer high rewards in rotating bonus categories. This means you could earn as much as 5% cash back in a particular spending category, but the category may change every few months.

How Do Cash Back Credit Cards Work?

Every time you make an eligible purchase with your cash back credit card, your card issuer will pay you back a percentage of that transaction. But just as you don’t have to pay your credit card bill immediately, your cash back reward won’t necessarily pay out immediately. Like your statement balance, your cash back rewards will accrue each month and show up on your monthly statement.

You can think of cash back rewards like getting a small rebate on every eligible purchase.

Here’s an example. If your card offers 1.5% back for any purchase in any spending category, and you spend $1,000 in a month, you’ll get $15 in cash back rewards. Once it appears on your statement, you may have the option to redeem all of it, part of it, or let it build up.

Ways to Redeem Cash Back

How you can go about redeeming your cash back rewards will depend on your card provider, and which options they have. Some of the ways that some credit card issuers could allow you to redeem cash back may include one or more of the following:

  • Statement credit.You may be able to redeem your cash back rewards in the form of statement credits.
  • Make a charitable donation.Some card issuers may let you transfer your cash back bonus to a charity of your choice.
  • Buy a gift card.Many cards offer a virtual shopping portal to purchase gift cards to select retailers—and some might even offer an extra $5 incentive to do so.
  • Apply cash back at online checkout.Some card issuers partner with retail sites to let you use your cash back bonus when making an online purchase.

It’s a good idea to check with your card provider to learn all the redemption opportunities available to you.

Choosing the Best Cash Back Credit Card for You

With so many different types of cash back credit cards and issuers, choosing the best cash back credit card for you is important to get the most out of your card. Consider the type of cash back rewards the card offers and find one that fits your spending habits.

It’s important to note that some cash back cards come with restrictions that can vary depending on how you choose to redeem your cash back. You might be able to make a charitable donation for an amount as small as a penny, for example, but you might have to use at least $20 of your cash back to get a gift card. In addition, there’s usually a limit or cap on how much cash back you can earn on your purchases. In most cases it’ll reset quarterly or yearly.

It’s also worth noting that, depending on your card issuer and the card itself, some cash back rewards might expire. There’s no industry standard or law that determines if and when your bonus expires, so it’s best to check with your card issuer to make sure you understand the terms and conditions. But keep in mind: you might lose your cash back if you close your account or go into default.

FAQs on What Is Cash Back and How Does It Work?

Does Cash Back Expire?
Cash back can expire depending on the type of credit card you have and the company that issued the card. Some cards, including cards from American Express, don’t have expirations dates for cash back rewards as long as your card is active and your account is in good standing. Be sure to check your card provider’s policy to see if your cash back rewards expire.

What Kinds of Cash Back Are There?
Credit cards generally offer flat rate cash back, tiered rate cash back, and variable rate cash back. When assessing potential cash back cards, check the card details to learn more about what kind of cash back rewards you could earn.

The Takeaway

Cash back credit cards offer a simple, straightforward way to get cash rewards for eligible everyday purchases.

What is Cash Back and How Does it Work? (4)

Megan Doyleisa business technology writer and researcher whose work focuses on financial services and cross-cultural diversity and inclusion.

All Credit Intelcontent is written by freelance authors and commissioned and paid for by American Express.

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The material made available for you on this website, Credit Intel, is for informational purposes only and intended for U.S. residents and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.

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What is Cash Back and How Does it Work? (8)

What is Cash Back and How Does it Work? (2024)

FAQs

What is Cash Back and How Does it Work? ›

Cash back is a form of credit card rewards you earn by making purchases with your credit card. You can redeem those rewards for statement credits, account deposits or purchases. In some cases, you can convert the cash back rewards into points and use them for other types of redemptions.

Is cash back free money? ›

No, cash back is not free money. You need to make a purchase with your card to earn cash back. Cash-back rates typically range from 1% to 5%, so you will still be paying for the majority of your purchase out of pocket.

Is there a downside to cash back? ›

Downsides of cash back programs

Sometimes, the issuer delays or caps your rewards at a certain amount, limiting your ability to get cash quickly. Higher costs for some. Cash back cards can carry higher annual percentage rates (APR), meaning you have to pay high fees if you carry a balance. Annual fees.

Does cash back mean I get money back? ›

Credit card cash back rewards are bonuses provided to credit card customers when they use their cards to make purchases. Cash back rewards can take the form of dollars or points — with points typically redeemable on an online marketplace operated by the card issuer. Cash back rewards operate on a percentage basis.

How do you use cashback? ›

You can:
  1. Receive a statement credit. The cash back gets applied to your credit card's balance.
  2. Request a check. The issuer sends you a check for your cash back rewards.
  3. Transfer rewards to a bank account. The rewards are electronically transferred into a linked bank account. ...
  4. Use your cash rewards as rewards points.
Feb 27, 2020

What is the catch to cashback? ›

The more that you use your cash-back rewards programs, the more money that you stand to earn. There are a few drawbacks to a cash-back rewards card, including a higher-than-usual APR, having to wait to access your cash-back funds, and a cap on how much you can earn each year.

What is the point of cashback? ›

Cashback, effectively a reward or incentive, is primarily used by credit card companies to encourage consumers to make purchases on credit more often. A cashback feature on a credit card allows the cardholder to earn a percentage (ranging typically from 0.25%-5%) of eligible spend.

What is the best thing to use cash back on? ›

Best Ways to Use Cash Back
  • Pay off debt. The smartest thing you can do with your cash back is to pay off your credit card debt. ...
  • Grow your emergency fund. Using your cash back rewards to grow your safety fund is an effortless way to save. ...
  • Don't splurge.
Aug 5, 2024

Is cashback trustworthy? ›

Cashback does seem to be a safe and legitimate site, but you should use it with caution. If you're not comfortable giving away personal data to the site, or to its third-party brands, you should steer clear.

Can you lose cash back? ›

If your cash back rewards have an expiration date, it's best to redeem those cash rewards as soon as you can; otherwise, you may lose the bonus cash accumulated through each eligible purchase. If you don't want to forfeit your active cash rewards, consider applying them as a statement credit if the card issuer allows.

Does cash back count as income? ›

If earned through the use of the card, like a cash-back bonus, the rewards are viewed by the IRS as a rebate and not taxable income. Rewards provided as an incentive just for opening an account (without you spending any money) could be considered taxable income.

Where does the money come from for cash back? ›

When merchants accept payment via credit card, they are required to pay a percentage of the transaction amount as a fee to the credit card company. If the cardholder has a participating cash back rewards program, the credit card issuer simply shares some of the merchant fees with the consumer.

Does cash back affect credit score? ›

When it comes to understanding cash back and credit scores, it's important to know that they don't directly impact one another. Using cash back offers doesn't negatively affect your creditworthiness. In fact, when managed responsibly, using a credit card with cash back benefits can improve your credit score.

What is a smart way to use your cash back? ›

How to redeem cash back
  1. Statement credit: Apply cash back as a credit to your account balance. ...
  2. Direct deposit or check: You can often transfer cash back to a linked bank account or request a paper check.
  3. Gift cards: Some cash-back cards may allow you to redeem cash back for various gift cards.

Does cashback go to your bank account? ›

The cash back is typically issued at the end of the statement period or billing cycle and you can redeem it as a deposit into a bank account, statement credit, check, gift card, and potentially other options, depending on the credit card. Cash-back credit cards come in different forms.

Does cash back charge a fee? ›

Cash-back fees are levied on low withdrawal amounts.

Levying a fee on small transactions may constitute a hefty percentage of the withdrawal amount, and it may also induce repeat withdrawals, with consumers incurring a new fee each time.

How does cashback make money? ›

Cashback sites earn money through affiliate marketing, which is the process of promoting the products or services of another company in exchange for a commission for every successful sale. When a customer purchases through a cashback site's affiliate link, the cashback site earns a commission.

Is cashback free at Walmart? ›

How much does Walmart charge for cash back? Walmart doesn't charge any fees to get cash back. However, you must make a purchase to get cash back, so you will need to cover the amount of the purchase plus the cash back.

What is cash back price? ›

About cash back offers

Instead of marking down product prices, the manufacturer or retailer offers to return some of the consumer's money after purchase.

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