How Do Cash Back Cards Work?

Cash back credit cards pay you a percentage of your spending. Typically, this is 1-2% on all purchases (with some cards offering a higher rate in specific categories).

For example, if you used a 2% cash back credit card to buy $100 worth of groceries, you’d receive $2.00 cash back.

What Kinds of Cash Back Credit Cards Exist?

Not all cash-back credit cards are created equal. They have different kinds of cash-back rewards systems (although all of them reward a percentage of your purchases).

Flat Rate Cash Back Cards

Flat rate cash back cards offer one singular rate – like 2% for all purchases made on the card. The cards are best for everyday spenders who don’t spend heavily in one specific category.

Tiered Cash Back Cards

Tiered cash-back credit cards have a standard flat rate and special cash-back rates in specific categories. For example, a tier cash back card may offer 1% back on all purchases and 5% back on any purchases made in US supermarkets.

These can be especially rewarding if you find a card with a high cash-back reward for goods and services you buy regularly.

Tiered Cards with Changeable Categories

Some credit card issuers (like Discover) offer category changes with their tiered cash-back credit cards. This means they offer a standard flat cash-back rate and a higher cash-back rate in specific categories that change regularly. Typically, category changes occur every quarter and need to be activated by the cardholder.

You can find cash back categories such as:

  • Restaurants

  • Grocery stores

  • Hotels

  • Delivery services

  • Gas stations

This kind of credit card is great if you spend in a variety of categories and can remember to activate your cash back rewards. If you don’t want to bother with changing categories, a flat rate card will likely be best.

How to Choose the Best Cash Back Credit Card

To reap the rewards from cash-back credit cards, you need to understand your spending habits. Choose a credit card that will pay you a high percentage for regular purchases. You’ll also want to consider how the sign-up offers, annual fees, and category bonuses fit with your financial situation.

Sign-Up Bonuses and Introductory Offers

It’s common for credit cards to offer a sign-up bonus (i.e. an introductory offer) as an incentive to future cardholders.

These sign-up bonuses may come with strings attached, like spending requirements within specific time periods. Be sure you can meet this requirement with what you already spend, as you don’t want to end up in credit card debt for a short-term perk.

Another common introductory offer is 0% APR. This zero-interest period will have an expiration date, and you want to be sure your balance is paid off before this date. Cash back incentives will not outweigh the interest you’ll pay if you carry a credit card balance.

Always read the fine print in the credit card disclosure so you know what the credit card can offer you after the sign-up bonuses expire. This will help you decide whether to apply for a credit card or not.

Annual Fees

While it’s not as common for cash-back credit cards to carry annual fees, some of them do (and offer larger cash-back bonuses to make up for it). The annual fee is only worth paying if the rewards outweigh the cost.

Category Bonuses

The category bonuses on cash back credit cards are an important consideration, too. Choose one that you’ll use consistently and offers a high percentage of cash back for the goods and services you buy the most.

Also, review the earning caps for specific categories. For example, the American Express Blue Cash Preferred® Card offers 6% cash back for groceries, but this only applies to $6,000 of supermarket purchases per year (then it returns to the standard 1% rate). The gas reward for this card is 3%.

Why Choose a Cash Back Card?

Cash-back credit cards are a popular choice for many, but you should review the pros and cons to see whether it’s the right credit card for you.

Pros of Cash Back Credit Cards

Get paid for purchases you already make

Variety of cash redemption choices (e.g. statement credit, direct deposit, mailed check)

Easy to find a cash-back credit card without an annual fee

Cons of Cash Back Credit Cards

Limited perks (e.g. loyalty discounts, airport lounge access)

If you carry a balance, the cash-back will not outweigh regular interest rates

Potential for earning caps in high-rate cash back categories

How to Benefit Most from Cash Back Cards

Predictable spending patterns can help you take better advantage of a cash-back credit card. You always want to compare your spending habits (and rewards) when evaluating how a cash-back credit card can benefit you. Once you understand this, direct your focus on the sign-up bonus and annual fee.

Get the Most Out of Sign-Up Bonuses

Think about the sign-up bonus as a short-term perk. For example, if you can earn a $250 statement credit for your first $1,000 in purchases, great. But how will the card benefit you afterward?

Sign-up bonuses can boost your rewards, but only for a period of time. Consider the long-term and the rates your card will offer for your spending habits.

Is Your Annual Fee Worth It?

Calculate how much you plan to spend on the card and how much you anticipate getting back. If it doesn’t wipe out the cost of the annual fee (while leaving a little cash in your pocket), find a cash-back credit card without one. Thankfully, you have plenty of cash-back credit card options that don’t carry these fees.