How does cash back work?

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Cash back credit cards offer a percentage of cash back on every qualifying purchase. Many cash back cards offer higher cash back percentages on popular spending categories like gas or groceries. Unlike travel credit cards, which often reward cardholders with points or miles that have different values depending on how they are redeemed, cash back rewards have a specific cash value. Cardholders can redeem that cash back in the form of statement credits, online purchases and more.

What is cash back, and how does cash back work on credit cards? Let’s take a close look at the different types of cash back cards, how to use your cash back rewards and what you need to know before choosing a cash back credit card.

What is cash back?

It may sound like a familiar term but what does cash back mean? When a credit card offers cash back rewards, it means that the cardholder earns a certain amount of cash back on every qualifying purchase. If a credit card offers 1.5 percent cash back per purchase, for example, you’ll earn 1.5 cents in cash back rewards for every dollar you spend.

Although earning a few pennies of cash back per dollar might not seem like much, your cash back rewards can quickly add up. A credit card that offers 5 percent cash back on groceries, for example, gives you the opportunity to earn $5 cash back for every $100 you spend—so if you spend $6,000 on groceries per year (that’s $500 per month), you could earn $300 cash back every year.

When you earn cash back rewards, your rewards are stored on your credit card account until you choose to redeem them. Many people like to redeem their cash back rewards for statement credits, which give you the opportunity to reduce the amount you owe on your credit card bill. Other people redeem their cash back rewards at Amazon, or use their cash back to cover purchases made through PayPal. In some cases, you can even request your cash back rewards in the form of a mailed check or gift card.

How you use your cash back is up to you. The great thing about cash back credit cards is that the value of your cash back will likely remain constant no matter how you choose to redeem it, with some cards even offering higher value for certain redemption options.

How to earn cash back

How does cash back work on credit cards? It depends on the card. Some cash back cards offer the same cash back rate on every purchase. Other cards offer higher percentages of cash back for certain types of purchases, like travel, dining, groceries or gas. A select number of cash back cards rotate their highest-earning cash back categories every quarter.

If you want to know how to earn cash back on a particular credit card, start by understanding the card’s cash back rewards system. Are you dealing with a flat-rate cash back card, a bonus category cash back card or a rotating category cash back card?

Flat-rate cash back cards

Flat-rate cash back credit cards offer the same cash back percentage on every qualifying purchase. It doesn’t matter whether you’re buying groceries at Costco or shopping online at Amazon.com—you earn the exact same percentage of cash back per dollar.

The Capital One Quicksilver Cash Rewards Credit Card, for example, offers a flat 1.5 percent cash back on all purchases. That’s a pretty standard cash back percentage for a flat-rate cash back credit card, and it works out to $15 in cash back rewards for every $1,000 spent.

Bonus category cash back cards

Some credit cards offer higher cash back percentages on certain types of purchases. These cards are called “bonus category cash back cards,” because you get bonus cash back if you shop in certain categories. Many bonus category cards offer their highest cash back percentage for popular shopping categories like travel or groceries.

The Blue Cash Everyday® Card from American Express, for example, offers 3 percent cash back at U.S. supermarkets (up to $6,000 per year in purchases, then 1 percent), 2 percent cash back at U.S. gas stations and select U.S. department stores and 1 percent cash back on all other purchases. If you spent $6,000 at U.S. supermarkets in a single year (which breaks down to only $500 per month), you could earn $180 in cash back rewards just for doing your grocery shopping. That’s before you factor in the rewards you might earn from gas station and department store shopping, as well as the 1 percent cash back you’ll earn on the rest of your purchases.

Rotating category cash back cards

Rotating category cash back cards are a little more complicated. Like bonus category cash back cards, rotating category cards offer higher cash back percentages on certain types of purchases—but these purchase categories rotate every quarter, and cardholders have to activate their rotating bonus categories before they can earn rewards.

The Chase Freedom FlexSM and the Discover it® Cash Back cards both offer rotating category cash back rewards. Both cards offer 5 percent cash back on categories that rotate every quarter (activation required), for up to $1,500 in purchases per quarter (then 1 percent). That’s $75 cash back per quarter or $300 per year if you max out your rotating category purchases. These 5 percent cash back categories include everything from grocery stores to streaming services and often feature popular online businesses like Amazon.com and PayPal.

The Chase Freedom Flex also offers 5 percent cash back on Chase Ultimate Rewards travel purchases, 5 percent cash back on Lyft rides (through March 2022), 3 percent cash back on drugstores and dining (including restaurants, takeout and eligible delivery services) and 1 percent cash back on all other purchases. The Discover it Cash Back card only offers 1 percent cash back on non-rotating-category purchases, but new cardholders can take advantage of Discover’s Cashback Match to double any cash back rewards they earn during their first year.

How to use cash back rewards

There are many ways to use cash back rewards once you’ve earned them. Some of the most popular ways to redeem your cash back are for statement credits, online shopping and gift cards. Certain cards also allow you to deposit your cash back directly into a bank account or use it to make a charitable donation. However, many cards offer the most lucrative reward terms, including increased cash back value, when you redeem your cash back to book travel through the issuer’s own online portal.

Some credit card issuers also let you connect your cash back rewards to PayPal or Amazon, allowing you to use your cash back rewards to cover part of your next purchase. Make sure you understand all of the ways your credit card allows you to use and redeem your cash back rewards—that way, you can put every dollar of cash back to good use.

Making the most of your cash back cards

The best way to maximize your cash back rewards is to combine a flat-rate cash back card with a bonus category or rotating category cash back card. Use the bonus category or rotating category card every time you’re shopping in one of the categories that earns a high percentage of cash back, and use your flat-rate cash back card for all other purchases.

Why does this technique work? Because most bonus category and rotating category cards only offer 1 percent cash back on other purchases— but the best flat-rate cash back cards offer at least 1.5 percent cash back across the board. So if a purchase is not in a bonus category, you can get more cash back by using your flat-rate cash back card. Knowing how to combine cash back cards to maximize your earnings will help you make the most out of your cash back rewards.

Best cash back cards for 2021

If you’re looking for a top cash back card, try to find a card that offers at least 1.5 percent cash back on all purchases—or, in the case of bonus category and rotating category cash back cards, at least 5 percent cash back on one or more spending categories.

Here are three of the best cash back credit cards for 2021:

Discover it® Cash Back  

The Discover it® Cash Back card offers 5 percent cash back on categories that rotate every quarter (activation required, up to $1,500 in purchases per quarter, then 1 percent). Cardholders earn 1 percent cash back on all other purchases. Here are the rotating categories in Discover’s 2021 Cashback Calendar:

  • January through March: grocery stores, Walgreens and CVS
  • April through June: gas stations, wholesale clubs and select streaming services
  • July through September: restaurants and PayPal
  • October through December: Amazon.com, Target.com and Walmart.com

Discover cardholders must activate their quarterly rotating categories before they can earn 5 percent cash back on purchases, but activation is relatively easy. Just watch for an email reminder or log in to your Discover online account, then click or tap the button that activates your categories.

Discover does not offer a sign-up bonus, but cardholders can double their cash back in their first year through Discover’s Cashback Match program. As the name implies, Discover will match all cash you earn in your first year as a cardholder—so make sure to activate those categories each quarter.

Blue Cash Preferred® Card from American Express

The Blue Cash Preferred® Card from American Express is one of the highest-earning bonus category cash back cards currently available. Cardholders earn 6 percent cash back at U.S. supermarkets (up to $6,000 per year in purchases, then 1 percent), 6 percent cash back on select U.S. streaming services, 3 percent cash back on transit and U.S. gas station purchases, and 1 percent cash back on all other purchases. Plus, new cardholders can earn a $300 statement credit if they spend $3,000 on their Blue Cash Preferred Card in the first six months.

The Blue Cash Preferred card charges a $95 annual fee ($0 introductory annual fee for one year), but cardholders can more than make up the cost of their annual fee by earning the $300 sign-up bonus—so keep that in mind if you’re trying to decide whether paying an annual fee is worth it. If you spend a lot of money on groceries and streaming services every month, the Blue Cash Preferred card could help you earn some of the highest cash back percentages on the market.

Citi® Double Cash Card

The Citi® Double Cash Card is a flat-rate cash back card with a twist. Cardholders earn 1 percent cash back on all purchases, with another 1 percent cash back awarded when you pay off those purchases. That’s a total of 2 percent cash back on every purchase if you successfully pay off everything you charge to the card. Plus, since you have to pay off your balances before you can earn that second round of cash back, the Citi Double Cash Card might also help you avoid credit card debt.

The bottom line

How does cash back work? Cash back credit cards reward cardholders with percentages of cash back on every qualifying purchase. Some cash back cards offer a flat cash back percentage, while other cards offer higher cash back rewards for certain categories of purchases. Cash back rewards can be redeemed for statement credits, converted into online shopping credits or deposited directly into bank accounts—it’s up to you to decide what to do with your cash back once you’ve earned it.

For more information about cash back credit cards, including tips and tricks to help you maximize your cash back rewards, visit Bankrate’s cash back advice center.