How does cash back work?

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Cash back credit cards offer a percentage of cash back on every qualifying purchase. Some credit cards offer a flat percentage back on all purchases, while others 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 fixed cash value. Cardholders can redeem that cash back in the form of statement credits, online purchases and more.

Learn more: Weighing a cash back card vs. a points and miles card

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.

In this guide:

What is cash back?

When a credit card offers cash back rewards, it means that the cardholder receives a certain percentage of every qualifying purchase back. If a credit card offers 1.5 percent cash back on every 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, especially on an everyday spending card.

A credit card that offers 3 percent cash back on groceries, for example, gives you the opportunity to earn $3 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 $180 of 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 statement.

Some cards allow you to redeem cash back for Amazon.com or PayPal purchases. In some cases, you can even request your cash back rewards in the form of a mailed check or gift card.

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. Others 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 or allow you to choose and change your bonus category.

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 dynamic 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 spent.

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 a higher rate of cash back, usually 2-3 percent, on purchases in certain categories, like travel or groceries. All other purchases generally earn 1 percent cash back.

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.

And 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 must activate their rotating bonus categories before they can earn rewards.

The Chase Freedom Flex℠ and Discover it® Cash Back cards 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 elevated cash back categories include everything from grocery stores to streaming services and often feature popular online businesses like Amazon.com, Walmart 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 at least 1 percent cash back on other purchases.

Aside from its rotating bonus categories, the Discover it Cash Back card offers only 1 percent cash back on general purchases. However, new cardholders can take advantage of Discover’s Cashback Match, Discover will automatically match all the cash back you’ve earned at the end of your first year.

Choose-your-own-category cash back cards

Lastly, there are cards that offer the option to select your own bonus cash back category. Like regular bonus category cash back cards, you’ll typically earn a boosted rate in a few select categories and 1 percent cash back on general purchases. However, instead of having a fixed category or having to keep track of rotating bonus categories, you can select your bonus category from a list of options.

For example, the Bank of America® Customized Cash Rewards credit card lets you choose one of six rewards categories to earn 3 percent cash back within: gas, online shopping, dining, travel, drugstores or home improvement and furnishing purchases, plus 2 percent at grocery stores and wholesale clubs (up to $2,500 of combined 3 and 2 percent category purchases each quarter, then 1 percent). You can change your selection once per calendar month.

The Citi Custom Cash℠ Card takes the manual selection process out of the equation with an automatically optimized rewards system. You’ll earn 5 percent cash back (on up to $500 each billing cycle, then 1 percent) on your top spending category each billing cycle. The 10 categories eligible for 5 percent cash back include restaurants, gas stations, grocery stores, select travel, select transit, select streaming services, drugstores, home improvement stores, fitness clubs and live entertainment.

How to use cash back rewards

There are many ways to use cash back rewards once you’ve accumulated a hearty balance. 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. Some cards even offer the option to use 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.com, enabling you to use your cash back rewards to cover part or all of your purchase.

Make sure you understand all the ways your credit card allows you to 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 earn a high percentage of cash back, and use your flat-rate cash back card for all other purchases.

This technique is effective because most bonus category and rotating category cards only offer 1 percent cash back on general purchases—but the best flat-rate cash back cards offer 2 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 one that offers 2 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:

Wells Fargo Active Cash℠ Card

The Wells Fargo Active Cash Card is a flat-rate cash back card with one of the best offers on the market: unlimited 2 percent cash rewards on every purchase. The Active Cash offers a third more value than the typical 1.5 percent cash back offered by many of its competitors.

Plus, the card currently offers $200 bonus cash rewards to new cardholders who spend $1,000 on purchases within the first three months.

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 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 subscriptions, 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 $300 back after you spend $3,000 in purchases within the first six months of card membership. You will receive cash back in the form of statement credits.

The Blue Cash Preferred card charges a $95 annual fee ($0 introductory annual fee for the first year), but cardholders can more than make up the cost of their annual fee by earning the welcome 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 on the market.

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 the higher 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 as the name implies, Discover will match all cash back you earn at the end of your first year as a cardholder—so make sure to activate those categories each quarter.

The bottom line

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.