What is Cash Back and How Does Cash Back Work?

Cash back is a perk many credit card companies offer on some of their rewards credit cards and refers to earning back a percentage of the money you spend on your credit card. Some cards offer the opportunity to earn even more cash back on purchases made by enrolling in quarterly promotions or making purchases through their virtual shopping portals.

Typically, there is a limit or cap on how much cash back you can earn on purchases through promotions or quarterly rewards programs. For example, the Discover it Cash Back card may let you activate 5 percent cash back at gas stations up to $1,500 for the quarter, and provide 1 percent cash back on all other purchases. Be sure to read the terms and conditions to fully understand (and take advantage of) your card’s cash back rewards program.

How Can I Redeem Cash Back?

Cash back can be redeemed in a number of ways:

  1. Bank Deposit: This is cash back that is earned and deposited directly into your checking or savings account. Some cards may allow you to cash out your balance without needing to earn a minimum amount. Be sure to read your terms and conditions to understand your redemption thresholds.
  2. Statement Credit: You can often apply your cash back to your current credit card balance.
  3. Gift Cards: Some credit card companies allow you to get additional value by redeeming your cash back in the form of gift cards or e-certificates for popular retailers.
  4. Charitable Donations: Some credit card companies allow you to donate some or all of your cash back to a charity of your choosing.

Should I Spend as Much as Possible to Earn Cash Back?

Cash back should not to be misinterpreted as an incentive to spend too much. Instead, you should look at it as a bonus for the money you would spend regardless of whether you were earning rewards. (The last thing you should do is charge more than you can afford just to get more cash back.) If you overspend and fall into debt, you risk running up interest charges that could wipe out the perks of rewards.

Choose the Right Card for You

A good idea may be to figure out which credit card is best for you, and then weigh all your options. Let’s break down the benefits so you can better weigh your options.

  • Understand the offers. First, make sure you understand the details of each offer. Does the cash back apply to all purchases, select categories or a combination of both? Some cards may return a higher percentage back for groceries than they do for gas, as an example. Also, be sure you understand the maximum amounts you can earn and when and where you can redeem your bonuses. Lastly, remember that cash back cards may come with expiration rules. So, don’t leave money on the table for missing regularly scheduled payments or going months without using your card.
  • Know your spending habits. Once you’ve nailed down the specifics of each offer, the next step is analyzing your spending habits and matching the cash-back categories to your style. What types of products and services do you purchase the most – books and movies? Home improvement? Travel? Some credit cards offer cash-back bonuses at different places throughout the year, so you have even more ways to save. In addition, other credit cards might feature shopping marketplaces that enable you to earn extra cash back at participating retailers.
  • Look beyond the cash back. While the cash back perks are enticing, don’t forget to compare the non-cash back features of the card with your spending style. Do you like to pay off your credit card in full every month or just make the minimum payment? If you want to get the maximum benefit from a cash back rewards card, it can be a good idea to pay off your balance each month to avoid paying interest.
  • Don’t forget about APRs. Even on a single credit card account, APRs can vary depending on a few different factors. For instance, one APR may be charged for purchases and another for balance transfers. Promotional APRs can let you save over the short term by offering you a low or 0 percent interest rate on certain kinds of transactions, for a limited period of time. Keep in mind that some credit card companies will increase your APR if certain conditions are not met. By paying your balance on time, you may help ensure you keep your low APR.
  • Compare fees. When it comes to credit card fees, be sure to read the fine print. Credit cards can vary significantly in what they’ll charge you for annual fees, late payments, balance transfer fees, etc. – so make sure you understand how these fees affect the way you like to spend. A Discover It card, for example, doesn’t penalize you for paying late by raising your APR, and there’s no late fee on your first late payment.

When choosing the right cash back credit card for you, read through the entire offer and get familiar with all the terms and conditions. Then carefully monitor your spending habits over the next few weeks to see how well your new card fits your lifestyle.

Originally published June 29, 2016.

Update August 5, 2019.

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