How credit card cashback works
Life is an expensive pursuit, however you look at it. This fact helps to explain why receiving cashback for merely using a credit card feels like such a win.
Getting some money back by using a card to pay for stuff you were going to buy anyway makes cashback pretty much a no-brainer. For who doesn't like a little reward at the checkout simply for handing over your card?
But how does cashback work?
If you are planning to get a cashback credit card, it's important that you know how it operates and what you can do with it. And that includes the fine detail of cashback. Knowing the ins and outs before you brandish your card at the gas station or restaurant will keep you on the right route when it comes to racking up and redeeming your cash back rewards. By knowing this, you can then make an informed choice about selecting the right cash back card and how to extract the most benefit from your spending.
Overview - Best cashback credit cards
Best 2% cash reward scheme
Wells Fargo Active Cash
Our rating - 3.8 out of five
Rewards - 2% cash on purchases
Annual fee - zero
Intro bonus - $200 cash reward
Standard APR - 14.99% to 24.99% Variable
Recommended credit score - Good to Excellent (FICO 670 - 850)
Pros
● Simple and unfussy
● Great reward rate
● It comes with cell phone protection
Cons
● Not the best choice for international travelers
Verdict
This one is a great choice for people with good to excellent credit ratings. The 2% cash back on purchases is unlimited.
In addition to the $200 reward on spending of at least $1,000 in your first quarter, there's also zero interest for 15 months on balance transfers and purchases.
Best for the supermarket
Blue Cash Preferred Card
Our rating - 4 out of five
Rewards - 6% off supermarket and select US streaming services
Annual fee - Zero for first year then $95
Intro bonus - Up to $350
Standard APR - 13.99% to 23.99% Variable
Recommended credit score - Good to Excellent (FICO 670 to 850)
Pros
● Ideal if you have hefty grocery bills
● Superb cash back rate
Cons
● The annual fee
● No cash back at Walmart, Costco, or Target
Verdict
Another guide choice, particularly if you have a family and pay by card at the supermarket. There's a sliding scale of cashback on other purchases, plus 0% on your first 12 months of purchases. Factor in the annual fee in the second year, though.
Best for rotating cash back categories
Discover it Cash Back
Our rating - 4.2 out of five
Rewards- 5% off purchases at select outlets every quarter, plus 1% on all other purchases
Annual fee - Zero
Intro bonus - Cashback Match
Standard APR - 11.99% to 22.99% Variable
Recommended credit score - Good to Excellent (FICO 670 to 850)
Pros
● Good choice for cashing in on your seasonal purchases
● First-year cash matching
Cons
● You have to keep track of and activate the category cash back every quarter
Verdict
Great card with an excellent cashback scheme and an innovative unlimited introductory cash matching program. There's also zero percent interest on balance transfers and purchases for your first 14 months.
Best for cash back up to 2%
Citi Double Cash
Our rating - 3.6 out of five
Rewards - 2% on every purchase. Unlimited 1% at the checkout and an additional 1% when you pay your bill
Annual fee - Zero
Intro bonus - None
Standard APR - 13.99% to 23.99% Variable
Recommended credit score - Good to Excellent (FICO 670 to 850)
Pros
● Straightforward no annual fee cashback card
● No nonsense 2% rewards
Cons
● Lack an intro bonus
Verdict
One of the least involved credit cards offering cashback. While you get an impressive 18 months zero percent interest on balance transfers, there is no additional cashback.
Best for 1.5% cashback
Capital One Quicksilver Cash Rewards
Our rating - 3.2 out of five
Rewards - 1.5% unlimited on every purchase
Annual fee - Zero
Intro bonus - $200
Standard APR - 15.49% to 25.49% Variable
Recommended credit score - Good to Excellent (FICO 670 to 850)
Pros
● Good choice for cashback first-timers
● No annual fee
● Includes travel protection
Cons
● Flat-rate
● Not good if you want to maximize rewards in particular shopping categories
Verdict
Capital One gives other cards plenty to think about with its 15 months of zero interest on balance transfers, no annual fee, or foreign transaction fees.
Best for restaurants
Capital One SavorOne Cash Rewards
Our rating - 4.5 out of five
Rewards - 8% cash back at Vivid Seats until January 2023, plus 3% on dining, groceries, and streaming services, and 1% on all other purchases
Annual fee - Zero
Intro bonus - $200
Standard APR - 15.49% to 25.49% Variable
Recommended credit score - Good to Excellent (FICO 670 to 850)
Pros
● Ideal if your spend on restaurants and entertainment is significant
● No annual fee
Cons
● Offers only 3% cashback on groceries
Verdict
The card of choice if you spend a lot on entertainment and eating out. Plus, there are no rotating categories or sign-ups required to earn rewards.
Best Bank of America card
Bank of America Unlimited Cash Rewards
Our rating - 3.3 out of five
Rewards - 1.5% cashback on every purchase
Annual fee - Zero
Intro bonus - $200
Standard APR - 13.99% to 23.99% Variable
Recommended credit score - Good to Excellent (FICO 670 to 850)
Pros
● You can choose six bonus categories and edit them once per calendar
● Set and forget simplicity
● 25% to 75% cashback boost for Preferred Rewards members
Cons
● Big spenders should look elsewhere to get better cashback rates
Verdict
A straightforward cashback card that doesn't involve jumping through hoops. Option to choose a contactless card.
Best sign up bonus
Chase Freedom Unlimited
Our rating - 4.6 out of five
Rewards - 5% cashback on groceries (up to $12,000) in the first year. Plus, 5% on Chase Travel purchases, 3% on dining and pharmacies, and 1.5% unlimited on all other purchases
Annual fee - Zero
Intro bonus - $200
Standard APR - 14.99% to 23.74% Variable
Recommended credit score - Good to Excellent (FICO 670 to 850)
Pros
● Good choice for US domestic travel
● Option to take cashback on Chase Travel purchases
Cons
● Not the best for international traffic as it charges 3% on foreign currency transactions
Verdict
This is a card where you can bag the $200 bonus by spending just $500 on your card in your first quarter. Plus, you get 5% cashback at almost all grocery stores.
Best for automatic bonuses
Citi Custom Cash
Our rating - 4.3 out of five
Rewards - 5% cashback on your top shopping category spend up to $500 then 1% in each billing cycle. Unlimited 1% on other purchases
Annual fee - Zero
Intro bonus - $200
Standard APR - 13.99% to 23.99% Variable
Recommended credit score - Good to Excellent (FICO 670 to 850)
Pros
● Ten eligible bonus categories
● 5% cash back for the first $500 in your favorite category
Cons
● Not a good choice if you only want the same bonus category all the time
Verdict
A solid card choice if you want no annual fee and the freedom from rotating shopping categories. Plus, you get zero percent interest on balance transfers and purchases for the first 15 months.
Best cashback choices
Bank of America Customized Cash
Our rating - 4.0 out of 5
Rewards - 3% quarterly in the category you choose, up to $2500. Plus, 2% on groceries and at wholesale clubs, and 1% on other purchases
Annual fee - Zero
Intro bonus - $200
Standard APR - 13.99% to 23.99% Variable
Recommended credit score - Good to Excellent (FICO 670 to 850)
Pros
● Freedom to chop and change your bonus rewards category
● Six bonus categories to choose
● 25% to 75% cashback boost for Preferred Rewards members
Cons
● The top rates of cashback only apply to the first $2,500 spent in categories each month
Verdict
Bank of America is always in the mix when it comes to financial products. And their cashback card is no exception. Well worth a look.
Do I need a cashback credit card?
According to a 2021 survey, almost 60% of American adults have at least one cash back rewards credit card. So whether you are deciding on your first-ever credit card or getting an additional card, a cashback card is a great method to earn rewards on your daily purchases.
Swap paying by cash or debit card, and you will be surprised just how quickly you can earn rewards. Using your card when you pump gas, groceries, and other everyday expenses and the cashback will soon mount up. Better still, it requires zero extra effort as all you are doing is changing the payment method for things you buy normally.
However, as you will see, no two cashback cards are the same. So you have to weigh up what offers will work best for you. Ultimately, you want to pinpoint the cash back card that will pay out on the things you regularly buy. There's little point in getting 5% off travel purchases, for instance, if you are a home bird that doesn't leave your own state.
Our ultimate guide to cashback credit cards will help demystify the issues surrounding these cards. And assist you in opting for the best card that suits your personal circumstances and spending habits.
So read on, and find out all you need to know about cash back credit cards and making the best choice.
Getting to grips with cashback
Like its name suggests, the cashback rewards scheme is pretty simple. All you do is pay for goods and services with your credit card. Then the card issuer will return some cents on every dollar you spend.
And that's pretty much it, no matter how excitedly the card issuer tries to dress it up.
Typically, cash back credit cards offer a flat rate cash reward scheme or use a rotating or bonus rewards program. For example, the Citi Double Cash card returns a 2% cashback reward. One percent is applied as soon as you make the purchase and the other 1% when you settle your bill. In other words, for each $100 you spend and bill to your card, Citi will give you back $2.
Meanwhile, with a flat-rate cashback scheme, every card purchase only results in you earning the same cashback amount regardless of the purchase's value. The leading flat-rate cards give users between 1.5% and 2% cash back on every purchase that they make.
In contrast, a credit card that operates a bonus or rotating scheme works differently again. Usually, you will earn more points or rewards for particular purchase categories, for example, travel, groceries, transportation, or dining out. Some cashback categories may be permanent fixtures, while others cycle every quarter to highlight different spending categories.
For example, take the Chase Freedom Flex card. It operates a tiered cashback scheme. It offers 5% on rotating categories every three months, but this requires activation and applies to the first $1500 of spending, then it drops to one percent. So, for example, dining out and pharmacy purchases attract 3% cashback, while other purchases net you 1%.
While a cent or two on the dollar doesn't seem that remarkable, over time and by using your card for routine daily expenses, the cashback rewards can soon mount up.
Do credit cards payout cashback? And what's the difference between cashback and a cash advance?
When discussing credit card cashback, it's important to avoid confusion between cashback rewards and obtaining a cash advance using your card. The two are quite different.
Firstly, cashback is a reward you get from your card company in the form of a small percentage of the money you spend using their card. A cash advance, meanwhile, is essentially using your card's credit limit to obtain a loan.
You would typically use your credit card at an ATM to get a cash advance. However, you should be aware that cash advances are very expensive. Therefore, your card company will apply an extra high interest rate from the moment you get your cash at the ATM.
In short, credit card cash advances are rarely a good option unless you are in a dire emergency. They will cost you dearly. In contrast, cashback gives you money back for using your card as a means of payment.
In other words, cashback gives you money while a cash advance takes it away.
How you get cash back using a credit card
Cashback is one thing that doesn't require a great deal of effort. All that's required is to pay for eligible purchases using your credit card rather than cash or a bank debit card.
As soon as you pay for a qualifying purchase with your cashback card, you will automatically receive a percentage back as per the reward scheme rules.
For example, say you spent $100 on a pair of sneakers. Paying with the Citi Double Cash credit card means you will get back a dollar, i.e., one percent of the purchase price. Then, when you have settled your monthly credit card statement, you will receive another 1% from Citi.
Meanwhile, a typical variable percentage refund on specific shopping categories is used by American Express for their Blue Cash card. This card offers you 6% cash back at US supermarkets, up to $6000 annually, then drops to 1%. The card also offers a similar rate on select American streaming services. This discount means you get $6 back every time you spend $100 at an American supermarket and $6 returned to you on your monthly $100 Netflix subscription, for instance.
Most cashback credit card providers have tempting offers for new cardholders, so it pays to shop around. Take a good look at what is on offer before committing yourself.
For example, the Chase Freedom Unlimited card and its Capital One counterpart Quicksilver Cash Rewards Credit Card are currently wooing customers. They are both offering a $200 cashback credit on your statement when you pay for $500 worth of purchases in the first quarter of your card membership. It's difficult to beat cold, hard cash as an incentive.
How to redeem your cash back rewards
Now that you have racked up your cashback rewards, how do you go about redeeming them?
This process varies by the card provider, so the rules are usually slightly different.
However, the usual way to redeem cashback rewards is by:
● having the funds paid out to your linked bank account
● check or via PayPal
● or you can use your rewards against your current outstanding balance.
Alternatively, other cashback cardholders opt to redeem their cash back by transferring the amount to their card provider's flexible rewards scheme to spend on travel. Often this can be the best way to redeem your cashback. This smart travel move is because many card issuers offer better redemption rates if you choose to 'cash in' your rewards this way.
However, certain cards impose a minimum cashback amount before they redeem your rewards.
When choosing a credit card, the best move is to look at your spending habits and work out which card will give you the best cashback rewards. That way, you get the best on offer without having to do anything different. Being rewarded for what you are spending already is the way to go, for sure.
Meanwhile, weigh up whether you will benefit from bonus category spending with a rotating bonus card and remember to activate each quarter. There's little point in getting bonuses for going to the movies or shopping in Target, for example, if you rarely go to the cinema these days or shop in Target.
Conclusion
So long as you can make more in cashback from your yearly purchases than the annual card fee, you are winning. And if you always pay the outstanding card balance each month, you are effectively getting free money. Nice!
Frequently Asked Questions about credit card cashback
What's a cashback credit card?
Certain credit cards offer you money back on what you spend. The cashback varies from card to card, but you typically earn a rebate on a range of eligible purchases, from grocery shopping, gas, education, and insurance bills.
Essentially, this type of card enables you to claw back a percentage of what you have spent using your credit card. This reward is credited to your account for you to redeem on other purchases or to reduce your current balance.
I have a cashback credit card. When do I get the cash?
The term cashback is a little misleading. You don't actually get physical, hard cash. So don't be looking out for an envelope in the mail stuffed with dollars. Instead, what you get are rewards that put cash back into your wallet.
Often cardholders will use the cash credited to their card account as cashback to offset their current balance. For example, say you redeemed $50 of cashback. If your outstanding balance is $250, you can use your cashback to reduce your balance to $200.
Is cashback free money in effect?
No, in that you have to spend money to get some back. In reality, if a card offers cashback, it simply shares some of the fees they charge merchants with the cardholder. The aim is to get credit cardholders to use their card instead of cash or bank debit cards, neither of which earn them any rewards.
How can I calculate my cashback?
Let's say your credit card operates a five percent cashback scheme. This means that when you spend a dollar with your card, you automatically get five cents back. So to calculate a 5% cashback reward, you multiply 0.05 cents by whatever you are planning to spend.
For example, if you spend $1000 on your card, that would be calculated as 1000 x 0.05, which amounts to $50.
Are credit card rewards taxable?
Though the IRS taxes your income, credit card cashback rewards are not regarded as income. Rather they are deemed to be rebates, bonuses, or discounts that are not considered taxable.