How does cash back work?

Imagine receiving a discount on every purchase you make. That’s the essence of cash back credit cards. These cards offer a percentage of cash back on every qualifying purchase. For example, if a credit card offers 1.5 percent cash back on purchases, you’ll earn 1.5 cents per dollar spent. Some cards offer even higher percentages in specific purchase categories, making cash back credit cards a valuable addition to any wallet.

Unlike travel credit cards that reward cardholders with points or miles of varying values, cash back rewards have a fixed cash value.

While travel credit cards and other rewards credit cards can provide value, cards that earn points and miles can sometimes be more complex to use. With cash back credit cards, you don’t have to worry about the value of your rewards — you can simply redeem your cash back for statement credits, online purchases, and more.

Let’s explore the different types of cash back cards to help you choose the right one to fit your lifestyle.

What is cash back?

Cash back is a form of credit card rewards earned by making purchases with your credit card. You can redeem these rewards for statement credits, account deposits, purchases, or even convert them into points for other types of redemptions.

It’s important to note that cash back rewards are not immediately available at the point of purchase like with a debit card. Your cash back rewards will appear in your account once the purchase is processed or paid off. Obtaining immediate cash back from a credit card is considered a cash advance and often comes with fees and high interest rates.

Earning cash back

Cash back rewards programs differ by credit card. Some cards offer a flat rate of cash back on every purchase, while others provide higher percentages on specific types of purchases such as travel, dining, groceries, or gas. Some cards rotate their top-earning cash back categories quarterly or allow you to select and change your bonus categories.

Flat-rate cash back cards

Flat-rate cash back credit cards offer a consistent cash back percentage on all qualifying purchases. Whether you’re shopping for groceries or online, you earn the same percentage of cash back per dollar spent. Rates generally range from 1.5 to 2 percent cash back.

For example, the Wells Fargo Active Cash® Card offers a flat 2 percent cash back on all purchases, while the Capital One Quicksilver Cash Rewards Credit Card offers 1.5 percent cash back on all purchases.

Pros of flat-rate cards

• Simple earning structure
• Consistent rewards
• No annual fee

Cons of flat-rate cards

• Slow accumulation of rewards
• Miss out on higher rewards in various categories
• Easier to forget rewards with hands-off structure

Tiered category cash back cards

Some credit cards offer higher cash back percentages on specific types of purchases, known as tiered-rate cash back cards. These cards provide higher rates, usually between 2 and 3 percent, on purchases in certain categories like gas or groceries. Once spending limits are reached, the category rewards may drop to 1 percent, while all other purchases earn 1 percent cash back.

For example, the Blue Cash Everyday® Card from American Express offers 3 percent cash back at U.S. supermarkets, gas stations, and online retail purchases up to $6,000 per calendar year in each category, then 1 percent cash back on all other purchases.

If you spend $6,000 at U.S. supermarkets in a year, you could earn $180 in cash back rewards. This is in addition to rewards from gas station and online retail purchases, as well as the 1 percent cash back on other purchases.

Pros of tiered-rate cards

• Higher rewards in common spending categories
• Strategic earning potential
• Faster reward accumulation compared to flat-rate cards

Cons of tiered-rate cards

• Spending caps in top categories
• Fixed issuer-chosen categories

Rotating category cash back cards

Rotating category cash back cards are more complex but potentially more rewarding. These cards offer higher cash back percentages, often 5 percent, on specific types of purchases that rotate quarterly. Cardholders must activate these bonus categories to earn rewards at the higher rate.

For example, the Chase Freedom Flex®* and Discover it® Cash Back cards offer 5 percent cash back on rotating categories up to $1,500 in purchases per quarter, then 1 percent. This can result in $75 cash back per quarter or $300 per year if you maximize your rotating category spending.

These categories may include groceries, streaming services, and popular online retailers like Walmart.

In addition to the rotating bonus categories, Discover cardholders earn 1 percent cash back on other purchases. New cardholders can benefit from Discover’s Cashback Match welcome offer, where all cash back earned in the first year is automatically matched.

Aside from the Chase Freedom Flex bonus category, cardholders can also earn:

• 5 percent back on Chase Travel℠ travel purchases
• 5 percent back on Lyft rides (through March 2025)
• 3 percent back on drugstore and dining purchases
• 1 percent cash back on all other purchases

Pros of rotating-category cards

• High rewards in everyday and seasonal categories
• Strategic earning potential
• Excellent rewards potential

Cons of rotating-category cards

• Requires strategic planning and attention
• Quarterly activation for top rewards
• Fixed issuer-chosen categories

Choose-your-own-category cash back cards

Some cards allow you to choose your own bonus cash back category. Similar to bonus category cash back cards, you earn a higher rate in select categories and 1 percent cash back on general purchases. However, instead of fixed or rotating categories, you can choose your bonus category from a list of options.

For example, the Bank of America® Customized Cash Rewards credit card lets you earn 3 percent cash back in a selected rewards category, such as gas, online shopping, dining, travel, and more. You’ll also earn 2 percent cash back at grocery stores and wholesale clubs, with a combined $2,500 spending limit per quarter, then 1 percent on all other purchases.

The Citi Custom Cash® Card offers an automatic rewards system where you earn 5 percent cash back on your top spending category each billing cycle, up to $500, then 1 percent on all other purchases. Categories eligible for 5 percent cash back include restaurants, gas stations, grocery stores, and more.

Pros of choose-your-own-category cards

• Customizable rewards for top earnings
• Strategic earning potential
• High rewards potential

Cons of choose-your-own-category cards

• Requires advance planning
• Spending caps limit top category earnings
• Limited time frames for category selection

Using cash back

Once you earn cash back rewards, they are stored in your credit card account until you decide to redeem them. You can use cash back in various ways, including statement credits, online shopping, gift cards, direct deposits, charitable donations, travel bookings, or connecting with payment services like PayPal or Amazon.com.