Life is expensive, there’s no getting around that fact. Which is why it can feel like such a win when you get cash back simply for using a credit card to make purchases you were going to make anyway, such as buying gas or dining out. If a cash back credit card is calling your name, before you start swiping, it’s important to understand how these credit cards work when it comes to earning and redeeming cash back rewards. That way, you can determine which cash back credit card is right for you and learn how to get the most bang for your buck.
How cash back works
How cash back credit card rewards work is pretty straightforward—you spend money on your credit card and the issuer gives you a few cents back in credit for every dollar you spend.
Cash back credit cards typically offer cash rewards at a flat-rate or using a bonus (or rotating) rewards structure. The Citi® Double Cash Card, for example, is a cash back card with a cash back reward return of 2 percent (1 percent when you spend, and another 1 percent when you pay off your purchases). That means that for every $100 you spend on your card, Citi will give you $2 back. With a flat-rate cash back credit card, every purchase leads to earning the same amount of cash back, no matter what the purchase is. The best flat-rate cards give cardholders 1.5 percent to 2 percent cash back on all of their purchases.
If you choose a credit card that has a bonus or rotating cash back structure, you’ll earn more rewards for certain types of purchases such as groceries, dining, transportation or travel. While some of these special cash back categories may remain the same, others might rotate on a quarterly basis to focus on a different spending category. For example, the Chase Freedom Flex℠ offers tiered cash back rewards, with 5 percent on rotating categories each quarter (activation required, up to $1,500 in purchases then 1 percent), 3 percent on dining at restaurants and drugstore purchases and at least 1 percent on other purchases.
While a few cents on the dollar may not seem like a lot, over time and with regular spending, cash back rewards can really add up.
See related: Cash back vs. points and miles credit cards
Can you get cash back off a credit card? Cash back vs. cash advance
When we talk about how to get cash back by using a credit card, it’s important to understand the difference between getting cash back rewards and getting cash as a cash advance. While cash back rewards are a return of a small percentage of money you’ve already spent, a cash advance is essentially a “loan” against the credit limit on your credit card.
When you take out a cash advance on your credit card—for example, by using your credit card to get cash out of an ATM—you will likely be charged a cash advance fee. You’ll also be subject to a high interest rate that begins to accrue immediately from the day of withdrawal. In short, a cash advance will likely cost you a lot of money and is rarely a good option, while cash back puts money back into your pocket for making purchases.
How to get cash back from a credit card
To get cash back from a credit card, all you have to do is spend money on an eligible purchase. Whenever you make an eligible purchase with your cash back card, you’ll automatically earn a percentage back based on the rules of your card. For example, if you spend $100 on a new pair of running shoes with the Citi Double Cash card, the card’s terms state that you’ll get 1 percent of the cost (or $1) when you make the purchase, and the other 1 percent ($1) once you’ve paid the charge off on your monthly statement.
If you have a card that pays a variable percentage back based on spending categories—like the Blue Cash Preferred® Card from American Express that pays 6 percent back at U.S. supermarkets (on up to $6,000 per year, then 1 percent) and 6 percent on select U.S. streaming subscriptions—you’ll get $6 returned every time you drop $100 at a U.S. supermarket and 6 percent back on your monthly Netflix subscription.
Most cash back credit cards also offer great cash back bonuses to new cardholders—something definitely worth paying attention to when you’re choosing your first card. For example, both the Chase Freedom Unlimited® and the Capital One Quicksilver Cash Rewards Credit Card are currently giving a $200 cash back statement credit when you spend $500 in the first three months of card membership. Can’t beat money as a welcome gift!
See related: Capital One QuicksilverOne vs Quicksilver
How to redeem cash back rewards
So, how do you go about redeeming cash back rewards once you’ve earned it? The actual process depends on the rules of the individual cash back card that you hold.
The most common ways to redeem your cash back rewards are by requesting a statement credit to offset your current balance or by having the funds distributed to you by direct deposits into a linked bank account or paid out via check or PayPal.
Some cash back cardholders also redeem their rewards by transferring the credits into the issuer’s flexible rewards program to use for travel. This can often be one of the most lucrative ways to redeem cash back, as many issuers offer greater redemption rates when you redeem this way. Some cards also require you to accrue a minimum amount of cash back in order to cash you out.
When you’re exploring all the current best cash back card options, you’ll want to make sure that you pick a card that rewards you for the type of spending you’re already doing. With a rotating card, consider whether you’ll be able to optimize bonus category spending and stay on top of activating each quarter.
The bottom line
As long as you’re making more cash back each year from your transactions than you’re paying as an annual fee, you’ll always come out on top with a cash back card. Pay the balance off each month and enjoy your free money—cash back cards are definitely worth it!