Cash Back Credit Cards: A Complete Guide to Earning Rewards

If you’re like me, and the shopping list for the 2020 holiday season growing by the day, you may be wondering about those cash back credit cards that everybody seems to be talking about and you don’t seem to have.

Yup: shop with your credit card and get more cash in your account.

Sounds too good to be true, right?

A cash back credit card or rewards card can be a great asset, but it’s important to pick the right one. We’ve rounded up some of the facts on how cash back credit cards actually work.

What is a cash back credit card?

Cash back credit cards pay back a certain percentage of what you spend (similar to a rebate). The typical rate is between 1 and 2% for purchases.

If a card has a 1% cash back rate, for example, you’ll earn $0.01 for every dollar you spend and earn $10 for every $1,000 you spend.

They’re a popular type of rewards credit card. More than half of companies offering rewards credit cards will have a cash back option.

Different cards come with different benefits which we’ll cover below. A good card can help you cover expenses, build credit, or even grow your savings.

How do the cash back cards work?

Signing up

Before picking a card and starting the sign-up process, you should have a good idea of your spending habits. Cash back cards are often designed with certain types of spenders in mind. Some cards, for instance, give you cash back whenever you travel. Others reward you for purchases at specific stores. The card will work best for you if its reward structure fits a buying habit you already have.

Once you’re ready to get a card, only sign up for ones you think you’ll use consistently. Sending out multiple applications for cards may seem like a good idea, but it can hurt your credit score.

Speaking of credit scores, cash back cards typically come with a credit score requirement. Many cards require a high score.

Cards sometimes offer perks once you’re approved. A sign-on cash bonus is a common perk, but be sure to read the fine print. You may have to spend a specific amount within a certain time frame to earn the bonus. The Chase Freedom Flex℠, for example, gives a $200 cash back bonus—if you spend $500 in the first three months from account opening. If you weren’t planning to spend the amount otherwise, the bonuses can end up costing you more than you’d save!

Your best bet is to pick a card with a smaller sign-up bonus but a higher consistent percentage rate of cash-back rewards.

Annual Percentage Rate (APR)

One of the most important things to understand about a cash back credit card is how its Annual Percentage Rate or APR works.

This calculation will be similar to the interest rate on any other credit card. An APR is the yearly, or annual, rate of interest on your card. If you can pay your balance in full and on time each month, you won’t end up with interest charges—which is exactly what you should do.

Two things can raise your interest rate on a cash back credit card: A high APR on the card to begin with, and a habit of carrying a balance (not paying in full) every month. Depending on the balance and the APR, the interest can stack up so high it cancels out any cash rewards.

And cash back cards with the best rewards programs usually—but not always!—come with a higher-than-average APR. Cards may offer a low introductory APR when you sign up.  After the intro rate expires the ongoing rate becomes something in the 15% – 25% range.

You’ll get the most out of a cash back credit card if you plan to keep your balance paid.

Fees

Many cards come with annual fees of between $50 to $100 per year just to maintain the card. The fee-heavy cards tend to offer larger cash rewards for purchases, though. To find out if the fee’s worth it, calculate how much you’re likely to spend and how much cash you’ll get back. The payback amount may be high enough to offset the fee (if you’re a regular at a grocery store and shopping for a family, for instance, you’ll spend plenty). Otherwise, look for a card with low or no annual fees.

Late payment fees might also stack up and cancel out your rewards. If your card comes with high late fees, be sure to keep payments up to date.

Another fee to watch out for is a foreign transaction fee. This one can be easy to miss. But it kicks in if you’re traveling abroad or shopping online at an international website. Look for cards with low or no foreign transaction fees if you think you’ll spend cash internationally.

Earning points

Moving on to the perks—how do you get cash back?

Most cards allow you to earn “points” which they’ll convert into your cash back amount. But the specifics of each card are different. Here’s what you should be aware of.

• Point caps. Cards will often have a limit or “cap” on how many points you can earn in a month, quarter, or year.
• Refunds and “cash value” perks. You may run into a card that operates like a cash back card, but offers refunds like gift cards as rewards instead. These cards are only a good deal if you think you’ll use the refunds.
• More cash back for certain purchases. Some cards, like the Capital One QuicksilverOne Cash Rewards Credit Card, give you the same rewards no matter what you buy. Others, like Chase Freedom Unlimited®, give you extra rewards in certain categories. For example, with Chase Freedom Unlimited®, you’ll earn cash back in select categories long after that year is up. From the date you get the card, you’ll earn 5% cash back on travel booked through Chase Ultimate Rewards®, 3% on dining and drugstore purchases, and then 1.5% unlimited cash back on all other purchases. What we’ve found is that the most common accelerated earning categories are, not surprisingly, necessities – gas and groceries. Restaurants and drugstores are also popular categories. Others include hotels, airlines, parking, and utilities.
• The card’s rewards may only apply to specific stores, gas stations, restaurants, et cetera. Ideally a card would earn you cash back at locations where you’re already a regular. You aren’t spending more or differently than you otherwise would, but you’re still earning rewards.
• Registering online. This is an aspect of cash back credit cards that’s easy to forget. To earn the accelerated rewards for certain categories, you’ll have to register your card online. Same goes if your card offers special temporary promotions. Keep an eye out for any new rewards or promotions you think you’ll use, and sign up by the deadline. This means you’ll have to read the correspondence from the credit card company carefully!

Payback rates

Cash back credit cards give you back a percentage of what you’ve spent. This percentage rate is between 1 and 2% for most cards. But with the varieties of cash back cards out there, you have lots of options.

You may run into the following payback rate structures:

• Flat rate. A flat rate card gives you the same percentage of cash back no matter how much you spend or where you spend it.
• Different rates for different spending categories. Some cards offer an “accelerated” or higher percentage of rewards for purchases in certain categories. The higher rate is often 5 or 6%. There may be a limit to how much you can earn in higher-rate categories per year.
• Rotating categories for higher rewards. Certain cards, like the Chase Freedom Flex℠, “rotate” new spending/bonus categories every quarter for customers to earn a higher (5%) cash back rate. You have to sign up or activate the category to get the extra cash back and there is a $1,500 max spend.
• Cards with variable rates aren’t always a better deal. If you’re already planning to purchase the higher-rate items, cash back cards can lead to great savings. But if you’re spending money you’d ordinarily save just to earn the rewards, the card might cost more than it earns.

Don’t want to keep track of higher-reward categories? Find a cash back card with a flat rate.

Redeeming points

Cards offer different ways to “cash out” your points once you’ve earned them. These could include:

• Mailing a check.
• Sending a direct deposit to your bank account.
• Applying rewards to your credit card balance.
• Giving you a gift card for a popular store like Amazon.
• Donating to a charity of your choice.

Most cards will let you choose between two or more options. When you’re ready to cash out you can go to the card’s website or call their customer service center.

When and how often do you get cash back? This varies. Some cards pay right away. Others pay once you hit a minimum amount like $20.

Can cash back rewards expire? Maybe. Take a look at the card’s expiration or forfeit policy before you sign on the dotted line. Several cards have no expiration date, meaning you can hold onto points as long as you keep the card active.

Other cards require you to redeem points before a cutoff time, usually between one and five years. If your points have an expiration date, make sure to redeem them on a regular basis—once every year or once every six months. Your card might offer a way to deposit rewards automatically in your bank account, similar to direct deposit for a paycheck.

Redeem all your points before you close your card or transition to another card. You can keep a cash back card active without using it much, but use it at least once every quarter (three months) to keep your rewards valid.

You should consider a cash back credit card if…

• You have good credit. You can get a cash back card with a less-than-ideal credit score. But better credit gets better deals—lower interest rates and higher payback percentages.
• You can pay your balance each month. Whether you’re already in this habit or want to develop it, paying off a credit card regularly is the best way to ensure you’ll reap maximum rewards. Cards with the best perks also tend to carry the highest APRs. When you stay on top of your balance, you won’t have to worry about a growing interest rate—and you’ll still get all the bonuses.
• You have predictable spending habits. This isn’t an essential for a cash back credit card, but it’s a good way to maximize rewards. If you get gas from the same station, shop at the same stores, or have a travel pattern, a cash back card offering higher rates in these categories can rack up the savings.

Some cash back credit cards to check out:

Summary

Cash back credit cards are amazing cards for those who can keep their spending in check and shop only at places that offer the best rewards. Use our guide above to help pick the best cash back card for your needs.

Read more

• Best Cash Back Credit Cards
• How To Get 5 Percent Back On Everything You Buy (Or, Almost Everything)