Cash back credit cards: How do they work?

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Cash back credit cards are a great way to get rewarded for your spending. These cards let you earn a percentage of your transactions as cash back.

From category bonus cards to flat-rate cards, there are many different types of cash back credit cards that offer flexible rewards. In this article, we’ll explore how cash back credit cards work, the different types of cards available and tips on how to choose the right cash back card for your needs.

How do cash back credit cards work?

In some ways, cash back is like a rebate — the cardholder gets a percentage of their money back after spending it. Rewards from eligible purchases can come in the form of statement credits, direct deposits or checks. While some cash back cards fulfill rewards in the form of points or miles, those still represent a cash value.

Here’s an example of how cash back credit cards work. Let’s say you have a card that earns 2 percent cash back on all purchases. So, if you spend $500 on the card, you will earn $10 in cash back. You could then redeem that $10 in a variety of ways, which vary depending on your card issuer and your card’s respective rewards program.

Keep in mind that you’re likely to lose your cash back rewards if you miss the minimum payment of your credit card bill. The terms vary based on the card issuer, but if you don’t make the minimum payment or are delinquent on your payments, your rewards could be suspended or lost entirely. Those who consistently pay their credit card bills, however, have nothing to worry about.

You can find a summary of your earned rewards on your credit card statement or your online account. You may have to use the online account to redeem the cash back as well.

Types of cash back cards

The rewards structure varies for cash back cards. Flat-rate cash back cards offer a uniform reward rate on all spending categories. Others offer different rates for different categories, either in fixed categories or rotating categories.

Here are the three primary types of cash back cards.

Rotating category cash back cards

Rotating category cash back cards offer cash back — often up to 5 percent — on a revolving list of categories. These categories are typically set by the issuer every quarter and are usually announced a few weeks before a new quarter starts. It takes a bit of work, but 5 percent cash back can be a nice haul if you’re able to max out the spending categories each quarter.

Note that you must register for the bonus categories every quarter, and spending in the rotating categories is often capped quarterly. If you aren’t able to maximize your spending in the rotating categories, such cards often give 1 percent in all other purchases. Unfortunately, that may bring down the average return you get from a rotating category card.

An example of a rotating category card is the Chase Freedom Flex℠*, which offers 5 percent cash back on up to $1,500 in purchases each quarter on rotating categories that you activate. The advantage of the Freedom Flex is that it also gives you bonus cash back on other fixed categories, such as 5 percent cash back on travel purchase through Chase Ultimate Rewards and 3 percent cash back on dining.

Bonus category cash back cards

Also known as fixed category cash back cards or tiered cash back cards, bonus category cash back cards offer more cash back in specific spending categories that stay the same throughout the year. Many of these cards offer more cash back per dollar on certain categories compared to other categories, leading to these cards’ being called dining cards or gas cards.

A popular gas card is the Costco Anywhere Visa® Card by Citi because of its 4 percent cash back on eligible gas and EV charging purchases (up to $7,000 in purchases, 1 percent thereafter). It also provides bonus cash back on other fixed categories, including: 3 percent cash back at restaurants and on eligible travel and 2 percent cash back on Costco purchases. General purchases earn 1 percent cash back.

Bonus category cards are some of the most widely issued cards because they often offer rewards on essential, everyday categories. Restaurants, gas stations, grocery stores, general travel, transit, streaming services, drugstores, home improvement stores, fitness clubs and live entertainment are just a few of the categories in which you can earn bonus cash back using one of these cards.

Flat-rate cash back cards

A flat-rate cash back credit card earns a flat percentage of cash back on every purchase, regardless of category. These cards’ main advantage is their simplicity, as there’s no need to track or activate any bonus categories.

Flat-rate cash back cards often don’t have spending caps, so they can be lucrative for big spenders. One flat-rate card that consistently ranks as a top cash back card is the Citi Double Cash® Card. Earning up to 2 percent cash back — 1 percent cash back on general purchases and another 1 percent cash back when you pay off those purchases — the Citi Double Cash is a great card for reliable cash back rewards.

How to choose a cash back credit card

There are a few factors worth considering when choosing a cash back card:

• Annual fees: Many cash back cards don’t charge an annual fee, but some do. When shopping for a card, it’s important to weigh the value of the card’s perks and rewards potential against the fee to make sure you’re earning more than you’re spending.
• Rewards redemption options: What you plan to redeem your rewards for is personal, but different cash back cards allow you to redeem rewards in different ways. Some only allow you to redeem your cash back for statement credits or direct deposits, while others let you redeem for gift cards, travel or merchandise.
• Terms and conditions: Before you sign up for a card, read the terms and conditions to see if there are any limits or requirements on the rewards. While issuer policies vary, many will take away the rewards points you’ve earned if you become seriously delinquent on the payments to your account.
• Rewards structure: Perhaps one of the most important aspects of choosing a card is making sure its rewards structure suits your spending habits. Unless you consider yourself a credit card enthusiast, you may find it tedious to track and activate categories on a rotating card. If you prefer simplicity, a flat-rate card would be best.

How to maximize cash back rewards

After you have the cash back card in your hands, how do you maximize your usage so that you make the most of your rewards?

For starters, take advantage of any limited-time rewards offers. The Chase Freedom Flex, for example, offers 5 percent cash back on qualifying Lyft rides through March 2025. Offers like these can sometimes be short-lived, so you should take advantage of them while you can.

To get the most of your purchases, you could try having two cash back cards — one for the bulk of your everyday purchases and one for all other purchases. However, if this is your strategy, remember that rewards can typically be transferred or combined only between cards from the same provider and of the same type.

Similarly, when choosing a cash back card, it’s important to find one that aligns with your spending habits. If you’re a homebody, a card that offers a higher rewards rate on purchases like travel or dining might not be the best option. The key is to use a card that allows you to earn more cash back on purchases you already make. Understanding your spending patterns is crucial in choosing the most suitable credit card for you.

And while cash back rewards can be lucrative, they won’t override any incoming interest if you carry a balance from month to month. Interest charges from a high credit card APR can quickly cancel out the value of your cash back rewards, so it’s best to avoid carrying a balance, if possible.

How to redeem cash back rewards

Once you’ve earned cash back rewards, it’s time to redeem them. There are multiple ways to redeem cash back rewards, depending on the issuer. The options may include automatic redemption after a certain number of days or a specific number of rewards, a statement credit, direct deposit, check, gift cards or merchandise purchased through the issuer’s shopping portal.

Some cash back cards associated with the major issuer travel rewards programs may even let you redeem your cash back rewards for travel, with each point generally valued at 1 cent. In some cases, you can combine your rewards to maximize their value. This option opens up the possibility of booking airfare, hotels, rental cars and more on the issuer travel portals using your cash back.

Bottom line

Cash back credit cards are a great way to earn rewards on your spending. They come in different forms such as rotating category cards, fixed category cards and flat-rate cards. The best way to maximize cash back is to apply for and use a card that suits your lifestyle, and to avoid carrying a balance.

*Information about the Chase Freedom Flex has been collected independently by CreditCards.com. The issuer did not provide the details, nor is it responsible for their accuracy.