How does cash back work?

Imagine getting a discount on every purchase you make. That, in effect, is what cash back credit cards offer. These types of cards give you a percentage of cash back on every qualifying purchase you make. If a credit card offers 1.5 percent cash back on purchases, for example, you’ll earn 1.5 cents per dollar spent. Some cards also offer far more than 1.5% in qualifying purchase categories, which makes cash back credit cards a lucrative addition to most anyone’s wallet.

Unlike travel credit cards, which often reward cardholders with points or miles that have different values depending on how they are redeemed, cash back rewards have a fixed cash value.

While travel credit cards and other rewards credit cards can certainly provide a lot of value to their cardholders, cards that earn points and miles as opposed to cash back can sometimes feel more complicated to use. Those with cash back credit cards don’t have to think about how much their rewards are worth — they simply redeem their cash back in the form of statement credits, online purchases and more.

Let’s take a closer look at the different types of cash back cards so that you can see what you need to know before choosing a cash back credit card to fit your lifestyle.

What is cash back?

Cash back is a form of credit card rewards you earn by making purchases with your credit card. You can redeem those rewards for statement credits, account deposits or purchases. In some cases, you can convert the cash back rewards into points and use them for other types of redemptions.

Now, let’s talk about what cash back isn’t. Cash back is not cash in your hand at the point of purchase like you can get with a debit card. Your cash back rewards won’t show up in your account until your purchase is fully processed — and in some cases, they won’t show up until you’ve paid off the purchase — so don’t expect to be able to redeem your cash back right after swiping your card.

In fact, getting immediate cash back from a credit card is called a cash advance and will usually incur a steep fee, as well as a high interest rate that kicks in as soon as you receive your advance.

Earning cash back

Cash back rewards programs vary by credit card. Some cards offer a flat rate of cash back on every purchase. Others offer higher percentages of cash back for certain types of purchases, like travel, dining, groceries or gas. A few cards rotate their highest-earning cash back categories every quarter or allow you to choose and change your bonus categories.

Flat-rate cash back cards

Flat-rate cash back credit cards offer the same cash back percentage on every qualifying purchase. It doesn’t matter whether you’re buying groceries at Costco or shopping online at Amazon.com — you earn the same percentage of cash back per dollar spent. It’s tough to find a rate higher than 2 percent cash back on all purchases, which is what the Wells Fargo Active Cash® Card offers.

A more common flat-rate amount is 1.5 percent on your purchases, which is what the Capital One Quicksilver Cash Rewards Credit Card offers, for example. Earn a flat 1.5 percent cash back rate on all purchases, which works out to $15 in cash back for every $1,000 spent.

Pros of flat-rate cards

• Simple earning structure
• Consistent rewards
• Will often come with no annual fee

Cons of flat-rate cards

• Slow to accumulate rewards
• Miss out on higher rewards in various spending categories
• Can make it easy to forget rewards with their hands-off structure

Tiered category cash back cards

Some credit cards offer higher cash back percentages on certain types of purchases. These cards are called tiered-rate cash back cards because you get a higher rate of cash back, usually between 2 and 3 percent — but sometimes much higher — on purchases in certain categories, like gas or groceries. These tired categories sometimes have spending limits that will cause the category rewards to drop down to 1 percent once that limit is reached. All other purchases generally earn 1 percent cash back, as well.

The Blue Cash Everyday® Card from American Express, for example, lets you earn 3 percent cash back at U.S. supermarkets, U.S. gas stations and U.S. online retail purchases on up to $6,000 per calendar year in purchases in each category (then 1 percent), as well as 1 percent cash back on all other purchases.

If you spent $6,000 at U.S. supermarkets in a single year (which breaks down to $500 per month), you could earn $180 in cash back rewards from grocery shopping. And that’s before you factor in the rewards you might earn from gas station and U.S. online retail purchases, as well as the 1 percent cash back you’ll earn on the rest of your purchases.

Pros of tiered-rate cards

• Higher rewards in common spending categories
• Opportunity to strategize for maximum rewards
• Can accumulate rewards more quickly than with flat-rate cards

Cons of tiered-rate cards

• Often have spending caps in top categories
• Locked into the issuer-chosen categories

Rotating category cash back cards

Rotating category cash back cards are more complicated, but also potentially more lucrative.

Like tiered-rate cash back cards, rotating category cards offer higher cash back percentages, frequently 5 percent cash back, on certain types of purchases. These purchase categories rotate every quarter, and cardholders must activate the rotating bonus categories before earning rewards at that higher rate.

The Chase Freedom Flex℠* and Discover it® Cash Back are two of the best rotating category cash back cards. Both offer 5 percent cash back on categories that rotate every quarter (activation required) on up to $1,500 in purchases per quarter (then 1 percent). That’s $75 cash back per quarter or $300 per year if you max out your rotating category purchases.

These elevated cash back categories could include anything from grocery stores to streaming services and often feature popular online businesses like Walmart.

Outside of earning in Discover’s rotating bonus categories, cardholders earn just 1 percent cash back on other purchases. However, new cardholders can take advantage of Discover’s Cashback Match welcome offer through which Discover will automatically match all the cash back you’ve earned at the end of your first year.

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

• 5 percent back on Chase Ultimate Rewards travel purchases
• 5 percent back on Lyft rides (through March 2025)
• 3 percent back on drugstore and dining purchases (including restaurants, takeout and eligible delivery services)
• 1 percent cash back on all other purchases

Pros of rotating-category cards

• High rewards in common everyday and popular seasonal categories
• Opportunity to strategize for maximum rewards
• Excellent rewards earning potential

Cons of rotating-category cards

• Require a high degree of strategy and hands-on attention
• Activation required quarterly to earn top rewards
• Locked into the issuer-chosen categories

Choose-your-own-category cash back cards

Lastly, some cards offer the option to select your own bonus cash back category. Like regular bonus category cash back cards, you’ll typically earn a boosted rate in a few select categories and 1 percent cash back on general purchases. However, instead of having a fixed category or keeping track of rotating bonus categories, you can select your bonus category from a list of options.

For example, the Bank of America® Customized Cash Rewards credit card lets you choose one of several rewards categories in which to earn 3 percent cash back. Category options include:

• Gas (and electric vehicle charging stations)
• Online shopping (plus cable, streaming, internet and phone services)
• Dining
• Travel
• Drugstores
• Home improvement
• Furnishing purchases

Plus, you’ll earn 2 percent cash back at grocery stores and wholesale clubs (on up to $2,500 in combined 3 percent and 2 percent category purchases each quarter, then 1 percent). You can change your selection once per calendar month, and you earn 1 percent cash back on all other purchases.

The Citi Custom Cash® Card takes the manual selection process out of the equation with an automatically optimized rewards system. Instead, you’ll earn 5 percent cash back (on up to $500 each billing cycle, then 1 percent) on your top spending category each billing cycle and unlimited 1 percent on all other purchases. The categories eligible for 5 percent cash back include:

• Restaurants (not including third-party dining services)
• Gas stations
• Grocery stores
• Select travel
• Select transit
• Select streaming services
• Drugstores
• Home improvement stores
• Fitness clubs
• Live entertainment

Pros of rotating-category cards

• High rewards in common everyday and popular seasonal categories
• Opportunity to strategize for maximum rewards
• Excellent rewards earning potential

Cons of rotating-category cards

• Require a high degree of strategy and hands-on attention
• Activation required quarterly to earn top rewards
• Locked into the issuer-chosen categories

Using cash back

When you earn cash back rewards, they’re stored in your credit card account until you choose to redeem them. There are many ways to use cash back, with some of the most popular redemption methods being statement credits, online shopping and gift cards.

Certain cards also allow you to deposit your cash back directly into a bank account or use it to make a charitable donation. Some cards even offer the option to use your cash back to book travel through the issuer’s online portal or connect your cash back rewards to PayPal or Amazon.com, allowing you to cover part or all of your purchase.

Make sure you understand all the ways your credit card allows you to redeem your cash back rewards. That way, you can put every dollar of cash back to good use.

What are cash back sites and apps?

You may be able to earn even more cash back by pairing your credit card with a cash back app. These apps, browser extensions and websites let you earn a small percentage of cash back on qualifying purchases that you make through the app or website. They may also let you compare prices, set price drop alerts and search for coupon codes.

After you accumulate a certain amount of earnings, you can send the money to a financial service like PayPal or to your bank account. Note that the cash back earned through these programs isn’t the same as the cash back earned with a cash-back rewards card. The rewards will accumulate in different accounts.

Popular cash back sites include:

• Rakuten. This website and its app and browser extension connect you with cash back deals at more than 3,500 top retailers, such as Walmart, Target and Old Navy.
• Dosh. By linking this app to your debit and credit cards, you can earn cash back on qualifying purchases at retailers, hotels and restaurants. Once your balance hits $15, your rewards can be transferred to you or even donated to charity.
• Ibotta. While this app and browser extension has partnerships with many retailers, it stands out for its deals on groceries. You can claim these whether you’re shopping in person or online.

To make the most of these services, use a cash back credit card to pay for your purchases. You’ll maximize your rewards by earning cash back both through the credit card and the app.

The bottom line

Cash back credit cards reward cardholders with percentages of cash back on every qualifying purchase, unlike other rewards credit cards that give you a set number of points or miles for every purchase. Some cash back cards offer a flat cash back percentage, while other cards offer higher cash back rewards for certain categories of purchases.

Cash back rewards can be redeemed for statement credits, converted into online shopping credits or deposited directly into bank accounts — it’s up to you to decide what to do with your cash back once you’ve earned it.

*Information about the Chase Freedom Flex℠ has been collected independently by Bankrate. Card details have not been reviewed or approved by the card issuer. The Bank of America content in this post was last updated on April 18, 2024.