How Do Cash Back Credit Cards Work? Plus Our 8 Favorites
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Nearly half of adults have cash back credit cards. And it’s no wonder why: They offer an easy way to earn a small rebate on everything you purchase, with some cards offering as much as 5% back (or more!) in certain categories.
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Maybe you got an envelope in the mail touting a new “cash back credit card.”
Or maybe your friend is always paying for dinner because she “gets 1.5% cash back.”
We wouldn’t be surprised, as nearly half of Americans hold cash back cards.
But what is a cash back credit card, exactly? And how does cash back work? Here’s everything you need to know.
What Is Cash Back?
Cash back occurs when credit card issuers reimburse you a certain percentage of a purchase — usually between 1% and 5% — when you put it on the card.
Say you spend $1,000 on a card that earns 1% cash back on all purchases. The credit card company will give you 1% ($10) in the form of cash back, often at the end of your billing cycle.
How Do Cash Back Credit Cards Work?
After the cash back appears in your online credit card account, the best way to redeem it is usually for statement credits. Continuing with the example above, you could apply that $10 cash back to your balance, reducing it to $990.
Although $10 per month may not sound that exciting, it can add up. If you spend $1,000 per month on a credit card that earns 1% cash back, you’ll earn $120 in statement credits over the course of the year — or $600 over five years. (And good news: That $600 typically isn’t taxable!)
If you choose a card with no annual fee, and pay your statement balance in full and on time to avoid interest and late charges, that’s $600 for doing nothing other than putting your everyday purchases on a credit card (learn more about how credit cards can be free to use).
You may also be able to redeem your cash back for a paper check, direct deposit, store gift card, or charitable donation. But, since statement credits reduce the amount you owe — rather than giving you money to spend anew — we’d say they’re the best option for most people.
It’s easy to see why cash back is the most popular type of credit card reward. You don’t need to worry about redeeming points for flights or hotels; you can simply spend like normal and then use the cash back to help reduce your bills.
While some cards do earn “points” instead of “dollars,” they can usually function the same way. The Chase Freedom Unlimited® (Review) has a cash back rate of 1.5 Ultimate Rewards points/dollar, with each point worth 1 cent when redeemed for statement credits.
Already using cash back credit cards? You can amplify your rewards even further by using a cash back app, like Dosh. It partners with both big-name and local businesses to provide cash back in addition to whatever your card already earns.
3 Types of Cash Back Credit Cards
- Flat rate: These cards offer a flat percentage back on everything, like the Capital One Quicksilver Cash Rewards Credit Card (Review), which earns 1.5% cash back on every single purchase. These are best for new or busy cardholders who want to earn rewards without a lot of fuss.
- Tiered categories: These cards generally offer 1% cash back on all purchases, plus an extra percentage in a handful of additional categories. The Blue Cash Preferred® Card from American Express (Review), for instance, offers 6% at U.S. supermarkets (up to $6,000/year) and select streaming services, and 3% at U.S. gas stations and on transit. Though these cards can be lucrative, you’ll need the time and mental energy to think about which card to use at which store. Note that big box retailers, like Target and Walmart, generally aren’t included in the grocery category.
- Rotating cash back bonus categories: These cards have bonus categories that switch every quarter. This year, for example, the Chase Freedom Flex℠ (Review) offered 5% cash back at gas stations and on streaming/internet/cable/phone services in Q1, and 5% cash back at grocery stores, gyms, and streaming services in Q2. Though 5% is some serious dough, these cards require dedication, as you’ll need to sign up for the promotions each quarter and keep track of which spending categories are on deck.
Most cards limit how much you can earn in their bonus categories, so make sure to read the fine print. As an example, the aforementioned Chase Freedom Flex only offers 5% cash back on the first $1,500 of combined purchases in the quarterly bonus categories. Once you’ve hit that threshold, you’ll earn 1% on those purchases until the next quarter rolls around.
How to Choose a Cash Back Credit Card
Ready to dive in and pick your perfect card? Take these two steps first.
1. Analyze Your Spending Patterns
Take some time to think about your spending habits, as this will help you determine what type of card to get. If you spend a lot on groceries, you should look for a card with higher cash back in that category. Alternatively, if you spend money in a variety of different categories, a flat-rate card might be a better choice.
Note that many experienced cardholders have at least two cash back cards: one with tiered or rotating bonus categories that they attempt to max out each quarter, plus a flat-rate cash back card they use the rest of the time.
If this is your first card, however, it might be wise to start out with just a flat-rate cash back card. Then, once you’re comfortable, you can expand your collection.
2. Do the Math
When selecting which card will prove the most fruitful, don’t guess — break out your phone and actually do the calculations. The results may surprise you.
When I was choosing a business card, for instance, I figured the Ink Business Unlimited® Credit Card (Review) would earn more since it offered 1.5% cash back on everything. But when I crunched the numbers, I realized the Ink Business Cash® Credit Card (Review) was a better choice because it earned 5% on my phone and internet bills, which are among my biggest expenses.
You should also consider the card’s annual fee. Since most cash back cards don’t charge one, any card that does should prove its mettle.
Lastly, you’ll want to include the card’s intro bonus in your calculations. Many cash back credit cards offer cash bonuses if you spend a certain amount — say, $500 — on the card within the first three months of account opening. Your chosen card should have the best signup bonus that doesn’t require you to spend more money than you normally would.
A Sample Head-to-Head Comparison of 2 Cards
The SavorOne offers 3% cash back on dining and entertainment, 2% at grocery stores, and 1% on everything else, plus $150 bonus cash after spending $500 in the first three months (at the time of publication — see the current offer here). It has no annual fee.
The Blue Cash Preferred offers 6% at U.S. supermarkets (on up to $6,000/year) and select streaming services, 3% at U.S. gas stations and on transit, and 1% on everything else. When this article was published, it had a $250 statement credit for spending $1,000 in the first three months, and an annual fee of $95. (See the current terms here: Blue Cash Preferred® Card from American Express (Rates & Fees).)
Here are two theoretical users, along with their monthly expenditures.
|Categories||Jorge’s Monthly Spend||Luz’s Monthly Spend|
|Gas & Transit||$100||$200|
Given their budgets, here’s how much cash back each would earn after one year of card membership:
- Capital One SavorOne: $330 ($27.50/month) + $150 introductory bonus = $480
- Blue Cash Preferred: $570 ($47.50/month) + $250 statement credit – $95 annual fee = $725
- Capital One SavorOne: $495 ($41.25/month) + $150 introductory bonus = $645
- Blue Cash Preferred: $414 ($34.50/month) + $250 statement credit – $95 annual fee = $569
As you can see, Jorge comes out on top with the Blue Cash Preferred, despite its annual fee, because he spends a lot in the bonus categories (groceries and streaming services). Luz, on the other hand, spends the most on dining and entertainment — and would therefore be better off with the fee-free SavorOne.
The bottom line: Once you’ve narrowed your options to two or three cards, estimate your monthly spend in their respective bonus categories to determine which will have the biggest payoff.
Some people don’t pay their credit card balance in full each month — if you plan to carry a balance on your cash back card, we’ll stop you right there. Earning 1%–2% cash back on your purchases is *not* worth paying 18% in interest. So only pursue a rewards credit card if you plan to pay your statement balance in full each month (unless you have a 0% APR).
8 Best Cash Back Credit Cards
Unlike most travel rewards cards, cash back cards are available to users with all types of credit histories — meaning there’s one for everyone.
Here are some of our favorites.
|Best For||Credit Card|
|Simplicity||Citi® Double Cash Card – 18 month BT offer|
|High Earning||Discover it® Cash Back|
|Gas & Groceries||Blue Cash Preferred® Card from American Express|
|Choosing Your Categories||U.S. Bank Cash+™ Visa Signature® Card|
|Bad Credit||Discover it® Secured|
|Fair or Average Credit||Capital One QuicksilverOne Cash Rewards Credit Card|
|Students||Discover it® Student Cash Back|
|Business Owners||Ink Business Cash® Credit Card|
Simplicity: Citi Double Cash Card
You’ll get 1% when you make a purchase plus 1% when you pay your bill (as long as you pay at least the minimum due on time) adding up to a flat rate of 2% cash back — the highest around. Trust us: It doesn’t get any easier than this.
High Earning: Discover it® Cash Back
With rotating 5% bonus categories and a cash back match at the end of your first year — essentially doubling what you earned — there’s no doubt you’ll stack some serious rewards with this card. The bonus categories need to be activated before they can be used, and are good for up to $1,500 in spending per quarter.
Gas & Groceries: Blue Cash Preferred® Card from American Express
It’s hard to beat 6% cash back at U.S. supermarkets (up to $6,000 spent per year) and select streaming services, as well as 3% at U.S. gas stations — so, for most people, this card’s earnings will outstrip its annual fee.
Choosing Your Categories: U.S. Bank Cash+™ Visa Signature® Card
Choose your own adventure with this card, which lets you select two different 5% cash back categories each quarter (including streaming, department stores, and home utilities), plus 2% in one “everyday category,” such as gas stations, grocery stores, or restaurants.
Bad Credit: Discover it® Secured
Making some credit mistakes doesn’t make you ineligible for cash back rewards. This is one of our absolute favorite cards for people with bad credit because it allows you to earn 2% cash back at gas stations and restaurants, up to $1,00 spent per quarter — and because it matches your cash back at the end of the first year.
Fair or Average Credit: Capital One QuicksilverOne Cash Rewards Credit Card
If your credit scores are somewhere in the middle, you can opt for this cash rewards credit card, which earns 1.5% on everything with a low $39 annual fee. If you’re traveling abroad, you can also take advantage of the fact it doesn’t charge foreign transaction fees.
Students: Discover it® Student Cash Back
Not only does this credit card offer 5% cash back on student-related quarterly bonus categories — think: Amazon, restaurants, Uber — but it also offers an end-of-year cash back match and a $20 statement credit for good GPAs! Your 5% reward categories must be activated throughout the year, and are good for up to $1,500 spent per quarter.
See more of our fave student cards here.
Business Owners: Chase Ink Business Cash℠
When you earn 5% at office supply stores and on internet, cable, and phone services, it’s a breeze to rack up cash back for your biz. Don’t spend much in those categories? Consider the Ink Business Unlimited® Credit Card (Review) and its 1.5% flat rate cash back instead.
For rates and fees of the Blue Cash Preferred® Card from American Express, please click here.
Susan is a freelance writer who specializes in turning complex financial topics into engaging and accessible articles. She's been writing about personal finance for six years, and was previously the senior writer at The Penny Hoarder and a staff writer at Student Loan Hero. Her personal finance writing has also appeared in publications like MarketWatch and Lifehacker.
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