What Is Cash Back on a Credit Card?

When choosing a new credit card, cash back is a feature that’s worth considering. Using cash back on a credit card may be like getting a discount on every qualifying purchase you make. Cash back credit cards are similar to travel rewards credit cards, which account holders may use to earn rewards miles. However, with cash back cards, rewards are typically issued in the form of dollars or dollar equivalents.

In this quick guide, we’ll cover exactly what cash back on a credit card is, the basics of these programs, and ways to maximize your rewards.

How Does Cash Back on Credit Cards Work?

Typically cash back credit cards reward their users with a percentage of their qualifying purchases. For example, a credit card with a rewards rate of 1% will reward its users with $1 cash back for every $100 spent in qualifying purchases.^[1]

Types of Cash Back Credit Cards

Cash back credit card programs may vary from one to another. Some cards may offer rewards only on grocery store or gas station spending. Other cards are far more flexible. And some cards may offer a higher rewards rate for purchases made in certain spending categories.

In addition, some issuers may place a limit on the amount of cash back credit card rewards that can be earned within a specific time frame.

Here’s a rundown of the most popular variations on the cash back theme:

• Fixed-category cash back cards: These types of credit cards offer rewards when they’re used only for spending in specific categories. These spending categories may include groceries, gas, restaurant meals, and more. These cards may offer higher-than-average rewards percentages, but those premium rewards may not matter if you don’t spend much money in those fixed categories.
• Tiered-rate cash back cards: These cards offer higher cash back rates for purchases made in multiple specified spending categories. For example, the cards may offer 1.5% cash back on most qualified purchases but 3% cash back on purchases made at gas stations. Or a card may offer a higher rate on purchases made with a particular retailer.
• Rotating-category cash back cards: These credit cards may offer a higher percentage of cash back for spending in particular categories for a specified length of time. For example, you may be able to earn a higher cash back rate for restaurant purchases made within a given quarter or month. The next period, the specified category may change.
• Flat-rate cash back cards: These types of cards offer the same cash back rewards percentage for each and every purchase, no matter which spending category. That means you may be able to earn just as much of a cash back percentage on a new pair of shoes as on a week’s worth of produce.

Customizable bonus cash back cards: There are a few credit cards that allow users to earn extra cash back in a category of their choosing. You may be able to earn the fixed base rate on most purchases, but you can choose a bonus rate on a specific type of purchase, such as live entertainment. They’re similar to tiered-rate cash back cards, but you get to choose the category that earns the bonus rewards.

It's worth noting that certain types of transactions may not be eligible to earn rewards. Nonqualifying purchases may include:

• Transferencias de balance
• Money order purchase
• Foreign exchange transactions
• Cryptocurrency purchases

How To Redeem Cash Back Rewards

Credit cards may allow users to redeem cash back in the form of a check, a credit on your monthly statement, or a prepaid debit card. The issuer may also issue rewards in the form of a gift card redeemable with a specific retailer. And if you have a checking or savings account with the financial institution that offers the credit card, you may be able to receive the cash by direct deposit.

Ways To Use Cash Back Rewards

If you’re serious about your finances, consider ways to use cash back rewards that involve saving money, putting rewards toward a specific expense, or paying off debt.

• Start an emergency fund: An emergency fund is money set aside — typically in a savings account — that is intended to cover an unexpected expense. The expense could be anything from an emergency room visit to a major car repair. In addition, emergency funds may be used to temporarily cover living expenses in the event of an unexpected job loss. Although the ideal size of an emergency fund may vary depending on your personal financial situation, a general rule of thumb is to save at least three months worth of living expenses.
• Save for a goal: If you already have an emergency fund in place, it may be worthwhile to put any cash earned from a credit card into savings to help you reach a financial goal faster. For example, you may want to save rewards money toward a down payment on a new home or car. You may wish to save money in an account that pays interest to make the savings go even further.
• Pay off debt: If you have high-interest debt — such as a revolving credit card balance — paying it off should often be a financial priority. You can do this by using the money earned from a credit card's rewards program. However, make sure that while earning credit card rewards you’re not taking on unnecessary debt that can’t be paid off each month.
• Use rewards to make purchases: If your credit card issues rewards in the form of gift cards rather than prepaid debit cards or checks, you can use them for purchases. For example, you may want to use gift cards to buy holiday presents for your friends and family. Or you may be able to receive a gift card for a hotel chain that you prefer to use on your next vacation.

How To Maximize Cash Back Rewards

If you’re able to use cash back credit cards responsibly and strategically, they may prove even more rewarding. Here are some tips for maximizing cash back credit card rewards:

• Choose the right card for your situation: Only apply for cash back credit cards that will truly benefit you. For example, if you have a large family, a card that offers rewards on grocery store spending may be a wise choice. However, if you don’t have kids and live in a big city, a card that offers rewards for entertainment and meals at restaurants may be the better pick.
• Make sure to activate the rewards: Some cards may require users to manually activate the rewards program to start earning cash back. Don’t overlook this step.
• Be aware of spending categories: By prioritizing the spending categories that earn cash back rewards or even higher-than-usual rewards, you can earn the highest cash back rates. Make sure that you understand what categories are rewarded — especially with a credit card that offers rewards for spending categories that may change.
• Know how much you can earn: Some credit cards may cap the amount of elevated cash you can earn back within a specified time period, such as a quarter or year. For example, a credit card may offer 2% cash back on up to $2,000 in gas purchases per year, and then revert back to the standard 1% cash back rate.

Pros and Cons of Cash Back Credit Cards

As with just about everything, there are advantages and disadvantages to cash back cards:

Cash Back Credit Card Pros

• Earn cash that may be used to save for an emergency fund or upcoming expense
• Earn a monetary credit towards your credit card statement
• Earn gift cards that can be used at hotels and restaurants around the globe
• Many cash back cards do not charge an annual fee
• Many cash back cards offer signup promotions

Cash Back Credit Card Cons

• To earn rewards, you may end up spending more money than you usually would
• Many cash back cards have earning caps that limit the amount you can earn
• Many cash back cards have high annual percentage rates (APRs)

Conclusión: What Is Cash Back on a Credit Card?

As with any financial decision, always perform your due diligence and select the cash back credit card that’s best for your needs. Using tools like PNC’s credit card comparison may make the choice easier.

However, keep in mind that cash back credit cards should always be used responsibly. Make sure to pay off the balance in full each month to avoid losing money to interest — the opposite of cash back rewards.