What are cash back cards and how do they work?

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Most cash back cards offer rewards on every dollar you spend, helping you make the most of your everyday spending. And when it comes to choosing a cash back card, you have options.

There are dozens of cash back cards on the market today. But how do you decide which one is right for you?  Here's how cash back cards work — and tips to find the best card for you. 

How do cash back cards work?

Cash back credit cards give you a percentage of your spending back as a cash reward. For example, if your card offers 2% cash back on all purchases, you would get $2 in rewards for every $100 you spend.

A basic cash back card may give you 1% back. A more premium card could offer anywhere from 2%-6% cash back in specific spending categories like gas, groceries, or dining.

Most cash back credit cards typically have no annual fee. Many also  offer 0% APR on purchases and balance transfers for a limited time, which can be beneficial if you’re looking to consolidate credit card debt.

Types of cash back cards

There are several types of cash back card choose from, each with its own unique rewards structure. 

Flat-rate cash back cards 

Flat-rate cash back cards are the simplest type of cash back card. These cards offer a fixed percentage of cash back on all purchases, regardless of the category. This makes them ideal for people who want straightforward rewards without having to keep track of rotating categories or spending caps.

Examples of flat-rate cash back cards include:

• Citi® Double Cash Card: Earn 2% cash back on all purchases (1% when you buy, plus an additional 1% as you pay for those purchases).
• Capital One Quicksilver Cash Rewards Credit Card: Earn an unlimited 1.5% cash back on every purchase.
• Chase Freedom Unlimited®: Earn 5% cash back on travel purchased through Chase Travel, 3% on dining and drugstore purchases, and 1.5% on all other purchases.

Bonus category cash back cards 

Bonus category cash back cards offer higher cash back percentages on specific spending categories, such as groceries, gas, or dining. These cards are perfect for people who spend a significant amount in certain categories and want to maximize their rewards.

Examples of bonus category cash back cards include:

• Blue Cash Preferred® Card from American Express: Earn 6% cash back at U.S. supermarkets (on up to $6,000 per year in purchases, then 1%), 6% on select U.S. streaming services, 3% at U.S. gas stations and on transit, and 1% on other purchases.
• Prime Visa: Earn 5% cash back at Amazon.com and Whole Foods Market, 2% at restaurants, gas stations, and drugstores, and 1% on all other purchases.
• Capital One SavorOne Cash Rewards Credit Card: Earn an unlimited 3% cash back on dining, entertainment, popular streaming services, and grocery stores (excluding superstores), and 1% on all other purchases.

Rotating category cash back cards 

Rotating category cash back cards offer higher cash back percentages on categories that change every quarter. These cards often require activation each quarter to earn the bonus cash back. 

They can be rewarding for those who don't mind keeping track of the rotating categories and adjusting their spending.

Examples of rotating category cash back cards include:

• Chase Freedom Flex℠: Earn 5% cash back on up to $1,500 in combined purchases in bonus categories each quarter you activate, 5% on travel purchased through Chase, 3% on dining and drugstore purchases, and 1% on all other purchases.
• Discover it® Cash Back: Earn 5% cash back on everyday purchases at different places each quarter, like Amazon.com, grocery stores, restaurants, gas stations, and when you pay using PayPal, up to the quarterly maximum when you activate. Plus, earn unlimited 1% cash back on all other purchases.

How to redeem cash back rewards 

Redeeming cash back depends on the specific card you have, but here are some common ways to redeem your cash back:

1. Statement credit: This is a simple way to offset your spending and save money on your monthly bill.
2. Direct deposit: This option gives you the flexibility to use your rewards as you see fit, whether it's for saving, investing, or spending.
3. Gift cards or merchandise: Depending on the card issuer, you may be able to redeem your cash back for gift cards or merchandise through the issuer's online rewards portal. Redemption value for these options may vary and might not always be the best deal.
4. Travel: Some cash back cards allow you to redeem your cash back for travel bookings, such as flights, hotels, or vacation packages.
5. Charitable donations: This can be a great way to support a cause you care about while also earning rewards on your everyday spending.

Are cash back cards worth it? 

Cash back cards may be worth it for those who spend in everyday categories and want to avoid an annual fee. Here are some pros and cons of cash back cards.

Advantages of cash back cards 

• Simplicity: Cash back cards offer a simple earning structure that rewards spending in everyday categories, like groceries or gas. Compared to credit cards that offer points, cash back cards can be considerably less complicated to use.
• Easy redemptions: You can redeem cash back for statement credits, merchandise, and gift cards. Plus, there are no blackout dates or restrictions on when and where to use cash back.
• No annual fee: Most cash back credit cards don't charge an annual fee, although some cards with lucrative rewards rates do.
• Introductory 0% APR offers: Many of the best cash back credit cards offer 0% APR on purchases and balance transfers for a limited time.

Limitations of cash back cards 

• Limited rewards value: Cash back may be worth less than points, depending on how you redeem rewards. You can often redeem points for more value when transferring them to travel partners or booking through your issuer’s travel portal.
• Fewer cardholder perks: Cash back cards come with some basic benefits but often won’t include travel benefits like airport lounge access or travel credits.
• Foreign transaction fees: Most cash back cards charge foreign transaction fees, making them a poor option for use abroad.
• High ongoing interest rates: While many cash back cards include 0% APR periods, the high variable APR that follows can make carrying a balance very costly.

How to pick the best cash back card for you

"Unlike some rewards cards that limit how much you can earn in a quarter or calendar year, there's no limit on how much you can earn with a flat-rate cash back card," says consumer finance expert Andrea Woroch. "That means you could earn much more back by using a single credit card compared to multiple ones with limitations on bonus reward categories."

Here are some factors to consider when picking the best cash back card for you. 

Spending categories 

Analyze your spending patterns to determine which categories you spend the most money on. If you spend a lot on groceries, for example, a card like the Blue Cash Preferred® Card from American Express, which offers 6% cash back at U.S. supermarkets (on up to $6,000 per year in purchases, then 1%), could be a great fit. 

If your spending is more varied, a flat-rate cash back card like the Citi® Double Cash Card (up to 2% cash back on all purchases) might be better for you.

Welcome bonuses 

Many cash back cards offer sign-up bonuses to new cardholders who meet a minimum spending requirement within a specific amount of time. Consider these bonuses when choosing a card, as they can provide a significant boost to your cash back earnings.

Annual fees 

Some cash back cards come with annual fees, while others don't. Generally, cards with annual fees offer higher cash back rates or additional perks. 

Assess whether the rewards you'll earn will outweigh the annual fee based on your spending habits.

Redemption options 

Consider how you want to redeem your cash back rewards. Some cards, like the Capital One Quicksilver Cash Rewards Credit Card, offer flexible redemption options, including statement credits, checks, and gift cards. Others may have more limited redemption options or minimum redemption thresholds.

Additional benefits

Cash back cards often come with additional perks that can add value. For example, the Chase Freedom Flex℠ offers cell phone protection and a 0% introductory APR on purchases and balance transfers. Consider these benefits when choosing a card, especially if they align with your lifestyle. 

Introductory 0% APR offers

If you're planning a large purchase or need to transfer a balance from another credit card, look for cash back cards with 0% introductory APR offers. The Capital One SavorOne Cash Rewards Credit Card, for instance, offers a 0% intro APR on purchases and balance transfers. Just be sure to pay off your balance before the introductory period ends to avoid paying interest.

Maximizing your cash back

Once you have a cash back card, it’s time to make the most of it. It may take some extra work, but following these strategies makes starting easy.

• Meet the sign-up bonus: Meet the spending threshold to earn your card's welcome bonus within the first few months. Some cards have a higher threshold than others, so pick a card with a requirement you can easily meet.
• Use your card for most spending: Whether you have a flat-rate, tiered, or rotating category card, try to use it for your highest-earning categories. You'll earn more cash back over time.
• Make sure to activate bonus categories: If you have a category cash back card, activate quarterly categories and aim spending at those merchants to maximize rewards.
• Pay off your statement balance each month: By paying your bill in full and avoiding interest charges, all cash back earned is free money that goes directly into your pocket.

The bottom line

Picking the perfect cash back credit card involves more than just comparing percentages. You should look at your spending habits and select a card that offers the highest earnings in areas where you already spend the most each month.

Rather than changing your lifestyle or overspending just to chase rewards, the right cash back card fits seamlessly into your budget.

Editorial disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.