Dear Cashing In,
I’ve been working on my credit and just became eligible for a rewards card. I’m thinking of getting a cash back credit card but I’m not really sure how they work. Is the cash mailed to me or something?—Chris
Good job on building and establishing your credit score to become eligible for rewards cards. While there are many different types of rewards cards, you’re right—cash back credit cards are a great place to start.
As you begin exploring the options for what cash back cards are currently available, you’ll first want to understand how cash back works and how to redeem the cash back rewards, so you know which card is right for you.
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How cash back works
How cash back works is pretty straightforward—you spend money on your credit card and the bank gives you a few cents back in credit for every dollar you spend.
Cash back credit cards typically earn cash rewards at a fixed or variable percentage rate. The Citi® Double Cash Card, for example, is a cash back card with a fixed 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, Citibank will give you $2 back.
While this may not seem like a lot, over time and months of 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 off 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, while cash back puts money back into your pocket.
How to get cash back from a credit card
How you get cash back from a cash back credit card is as simple as spending money. Any time you make an eligible purchase with your cash back card, you’ll automatically earn a percentage back based on the rules of your card according to what you’ve purchased.
If you spend $100 buying a new pair of running shoes on that Citi Double Cash card, for example, the card’s terms state that you’ll get 1 percent of the cost (or $1) credited on purchase, and the other 1 percent ($1) credited to your account 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 in charges per year, then it’s 1 percent) and 6 percent on select U.S. streaming services, you’ll automatically get $6 returned to your statement every time you drop $100 at the grocery store, and 6% back on what you’re paying for your monthly Netflix package.
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 only $500 in the first three months of card membership. Can’t beat free money as a welcome gift!
See related: Capital One QuicksilverOne vs Quicksilver
How to redeem cash back rewards
How do you redeem cash back rewards once you’ve earned all of these dollars back? Getting the money back into your pocket is easy, but the actual process depends on the rules of the individual cash back card which you hold.
The most common ways you can redeem your cash back rewards for money are via requesting a statement credit to offset your current balance, or having the funds dispersed 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 exchanging them for gift cards or transferring the credits into the bank’s flexible rewards program to use for travel. 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 in order to choose which one is right for you, you’ll not only want to make sure that you’ll earn as much cash back as possible on your transactions, but also that you like the options that the card offers for getting your cash back to you.
Bottom line: Are cash back credit cards worth it?
As long as you’re making more cash back each year from your transactions than you’re paying in 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!