Making Money Work For You

Cash back credit cards: How do they work?

What could be easier than getting a little money back on the things you buy every day? That’s how cash back credit cards work and what makes them appealing to some consumers.

Cash back cards come in a variety of flavors – bonus category, tiered rewards and flat percentage cash back cards – but they all pay you back. Flat percentage cash back cards are ideal for the “set it and forget it” crowd, but bonus category and tiered rewards cards can offer more rewards – if you’re willing to put in a little legwork to maximize your cash back in select spending categories.

Here we take a look at the different types of cash back cards and how they work, the key benefits of cash back cards, how to redeem cash back and how to choose the best cash back card for you.

See related: How to choose a credit card

How cash back cards work

So how do all of these cash back cards work? It’s simple: Cash back is essentially a rebate of a percentage of the purchases you make on the card. With flat-rate cash back credit cards, every purchase earns the same percentage cash back, while with category bonus cards and tiered bonus cards, different types of spending earn more cash back.

Card issuers can afford to pay cash back because merchants pay an interchange fee on each transaction. “When you pay a merchant $100 with a credit card, the merchant only receives about $97,” says Daniel Mahoney, a certified financial planner in Atlanta.

For example, a TV that costs $700 would net you $14 with a 2% cash back card. The merchant, meanwhile, paid a transaction fee of around $21 when you paid with your credit card.

“Rewards or rebates may also be funded by deals between the credit card issuer and specific merchants,” Mahoney adds. An example of this is cash back earned through card-linked offers.

How do card issuers know what types of spending qualifies for which percentage of cash back? Merchant category codes are four-digit numbers denoting a business type, such as a gas station or grocery store. Merchant category codes are used by credit card networks to categorize and track purchases.

How to redeem cash back

There are a number of ways to redeem your cash back rewards, including as a statement credit, check or deposit to a bank account, toward travel, to purchase gift cards or merchandise or as a donation. How many options you have and what requirements must be met before you can redeem will vary from card to card and issuer to issuer.

Statement credits are the most common cash back redemption method and, as the term implies, act as credits against your existing card balance. For example, if you earned $20 in cash back and redeemed your rewards as a statement credit, your card balance would be reduced by $20.

Statement credits give you a simple, convenient way to save money over time, but since they’re tied to your card account, they offer a bit less flexibility than “true” cash back in the form of a check or direct deposit, which you can save or spend however you like.

Generally speaking, redeeming your rewards is as simple as choosing your redemption method, specifying the amount you want to redeem and hitting submit. Some cards also offer automatic cash back redemption in the amount and via the method you specify once you’ve reached a specific earnings threshold.

While statement credits, checks and direct deposits tend to get you full value for your rewards (with $1 earned yielding a $1 credit or direct payment), other redemption methods like gift cards and donations may only net you a fraction of your rewards value.

On the other hand, pairing a cash back card with a higher-tier travel or rewards card can sometimes boost the value of your cash back rewards, as in the case of the so-called “Chase trifecta“.

Check with your card issuer’s rules on cash back redemption amounts and options, as some cards offer more restrictive redemption schemes than others. For example, while a card like the Chase Freedom Unlimited allows you to redeem your cash back as a statement credit, check or direct deposit in any amount, anytime, the Costco Anywhere Visa® Card by Citi only issues rewards annually as a certificate with the February statement.

Benefits of cash back credit cards

Along with the obvious benefit of allowing you to earn a bit of money back on most – if not all – of your spending, cash back cards offer a number of advantages for experienced and newbie cardholders alike.

To start, cash back cards can offer more simplicity than other rewards credit cards. Since you get back a percentage of your card spend, you’ll always have a pretty good sense of how much money you’re earning. Cards that earn points or miles, by contrast, often require you to calculate point values and weigh redemption options to be sure you’re getting the most out of your rewards.

“The primary benefit of a cash back card is the simplicity,” says Roman Shteyn, owner and CEO of

“You don’t have to think too much about how much you’re earning while using the card, and when it comes to redemption, the best cash back credit cards are pretty straightforward. Most people just deduct their cash back from their statement balance or redeem for gift cards.”

Cash back cards also stand out as a low-effort savings tool. Indeed, the typical savings account earns a measly 0.05% annual yield, while nearly all cash back cards offer at least 1% back on every purchase. Your return is even greater with cash back cards offering a flat 1.5%, 2% or more on every purchase.

And unlike the interest on your bank account, cash back comes tax-free.

“The IRS has historically viewed credit card cash back as a nontaxable rebate on the purchase price, rather than as a taxable form of income,” says Mahoney.

Something else to think about: Cash back, if loaded back on your card, also earns its own cash back when you spend it, adds financial planner Andrew Feldman of Chicago. “It’s a fraction, but it’s still a little more cash,” he says.

Factor in that some cash back cards offer sign-up bonuses of $150 or $250, and that is even more cash for you for using the card.

See related: Cash back vs. points

Types of cash back cards

There are three main types of cash back credit cards: Category bonus cash back cards, which offer a high cash back rate in spending categories that change throughout the year; tiered rewards cash back cards, which offer consistent cash back in specific categories of spending; and flat-rate cash back cards, which get you cash back at the same rate on all purchases.

Category bonus cash back cards

Overview: Category bonus cash back cards offer the lure of 5% cash back from revolving spending categories. These categories are typically set by the issuer every quarter and are usually released a few months before the new quarter starts. Five percent back can be a nice haul if you’re able to max out the spending categories each quarter, but it takes a bit of work.

First, you have to register for the bonus categories every three months, and spending in the categories is capped at a set amount each quarter (typically $1,500 in purchases). Since any purchase not in the bonus category earns 1%, you may not be getting the average return you think you are.

Pros: These cards allow you to earn cash back at an impressive rate in a variety of different spending categories, which could be ideal for cardholders whose spending varies from month to month. If your spending habits are flexible and you’re strategic about when and where you buy, category bonus cards can offer lucrative returns.

Cons: They can be a headache to keep up with, often requiring you to manually enroll in a category each quarter and track your spending to ensure you’re maximizing your cash back in a given category. You’re also at the mercy of the issuer when it comes to which categories are eligible for bonus rewards, and categories may not line up with your spending habits or may be tough to maximize.

Top cards: Discover and Chase each offer popular category bonus cards, including the Discover it® Cash Back, Discover it® Student Cash Back and Chase Freedom Flex cards.

The Discover 2021 bonus categories have already been released and include grocery stores, gas stations, wholesale clubs, restaurants and online shopping at stores like Amazon, Target and Walmart. Chase Freedom Flex bonus categories, on the other hand, are only announced on a quarterly basis.

The U.S. Bank Cash+ Visa Signature Card is a variation on the rotating bonus category theme, but the cardholder picks the bonus categories that will earn the most cash back for the types of purchases they make most.

See related: Chase Freedom Flex vs. Discover it Cash Back

Tiered rewards cash back cards

Overview: Like category bonus cards, tiered rewards cards offer more cash back in select spending categories, but to maximize your earnings you have to think about which card to use with each purchase.

For example, Feldman puts all his business expenses on his tiered rewards American Express SimplyCash Plus business card and his own personal expenses on a Citi® Double Cash Card that delivers a flat 2% (1% when you buy and 1% as you pay for your purchases).

His Amex business card rewards 5% on office supply stores and wireless telephone service, 3% on gas (cardholders choose from eight categories for this tier) and 1% on everything else.

At the end of each year, Feldman calculates the rewards delivered on the total amount he spent. He says both of his cards end up delivering the same cash back on average.

“The Amex works out to about 2%, maybe slightly under,” Feldman says. “I just don’t spend enough on office supplies to max out that 5% category.”

“Could I get back another couple dollars at the end of the year by using a credit card targeted to each category of my spending?” Feldman asks. “It’s possible, but I’d have to think about which card to use every time I made a purchase and that would make my life crazy.”

Pros: Tiered rewards cash back cards may offer a bit more consistency than category bonus cards, as bonus categories are the same year-round. You’ll know before you apply if an elevated rewards rate in a given category like travel or dining makes sense based on your spending, and you can pair a tiered rewards card with a flat-rate card to ensure you’re maximizing your earnings.

Cons: These cards tend to earn a low rate on general purchases, and people often overestimate how much they spend in a given category, like gas or airfare. You’ll have to take a close look at your spending habits to determine whether a tiered bonus category card really makes sense for you or if you’d be better off with a card that earns the same flat rate in cash back on every purchase.

Top cards: While the best choice for you will depend on how you spend, one of our top picks is the Blue Cash Preferred® Card from American Express, which offers 6% cash back at U.S. supermarkets (up to $6,000 in purchases per year, then 1%), 6% back on select U.S. streaming service subscriptions, 3% cash back at U.S. gas stations and 1% cash back on all other spending.

Supermarket purchases make up a big chunk of the average person’s spending habits, so a card that offers bonus rewards in this category should be useful to the majority of cardholders.

Flat-rate cash back cards

Overview: With simple cash back cards, also called flat-rate cash back cards, you earn a flat percentage with every purchase. There’s no need to track and activate bonus categories. You earn the same cash back on every purchase.

Mahoney carries the Bank of America® Travel Rewards credit card which earns 1.5 points per dollar (effectively 1.5% cash back) plus a 75% bonus for being part of the bank’s Preferred Rewards Platinum Honors program.

“That’s effectively 2.625% cash back*,” Mahoney says (2.625% cash back referencing 1.5 points per dollar plus 75% boost for Preferred Rewards program). “The caveat is the cash back must be used as a reimbursement for travel purchases**, but lots of things count for that, even Uber and Lyft.”

Feldman recently switched from the Capital One Quicksilver Cash Rewards Credit Card, which offers 1.5% cash back, to the Citi® Double Cash Card, which earns up to 2% cash back (1% when you buy and 1% as you pay for your purchases).

Why did he switch? “2% is better than 1.5%,” he says.

Also, “I miss the convenience of being able to log in and get my rewards in one sweep or set it up for an automatic $25 or $50,” he adds. “I like to cash in my points immediately so I don’t forget about them.”

Frequent-flyer expert Gary Leff likes the Fidelity Rewards Visa and Citi Double Cash cash back cards.

With the Fidelity Rewards Visa, cardholders earn 2% on all purchases, but you need to be a Fidelity account holder with excellent credit to qualify for the card.

“Most people aren’t going to beat 2% cash back, even with travel rewards,” says Leff, who blogs at View from the Wing.

Pros: You won’t have to track spending or enroll in bonus categories. You can simply use your card for every purchase and rest assured you’re earning cash back at a consistent rate. This makes flat-rate cards ideal for those who want to avoid the hassle of juggling multiple cards or someone who’s looking to supplement their current tiered rewards or category bonus cash back card.

Cons: While these cards offer consistent rewards on every purchase, you may be missing out on bonus rewards in a category of high spend, like groceries or dining.

Top cards: A top pick in this category is the Citi Double Cash card, as it offers one of the highest flat cash back rates available, charges no annual fee and can pair with a premium Citi card to make earning travel rewards a breeze. It also encourages responsible card use by only giving you the second 1% back once you’ve paid off your purchases.

Types of cash back cards compared

We ran the numbers to see how flat rate, category bonus and tiered bonus cash back earnings would break down based on an average American’s spending (drawn from a Bureau of Labor Statistics consumer expenditures survey):

2% flat percentage 5% category bonus* 6% tiered bonus**
$21,897*** at 2% $14,645 at 1% ($14.65) $16,596 at 1% ($16.59)
$6,000 at 5% ($300) $4,464 at 6% ($267.84)
$437.90 in cash back per year $314.65 in cash back per year $284.43 in cash back per year
* This assumes the category bonus cardholder maxes out the $1,500 in qualified quarterly spending, which is difficult to do every quarter.
** The Blue Cash Preferred from American Express offers 6% cash back at U.S. supermarkets and other tiered rewards, so total cash back will be higher.
*** This includes expenses on food, gas and oil changes, vehicle expenses, apparel and services, entertainment and other expenditures
– research, March 2020

How to choose a cash back credit card

Which cash back card is right for you depends on how much thought you want to put into which card to use where.

While some cash back cards offer outsized bonuses on specific types of purchases or in rotating bonus categories, you’ll have to remember to use the right card at the right time and place. Not only will you need to pay attention to your account to see how your issuer categorized your purchase, but you may also need to manually enroll in a bonus category each quarter to reap the benefit of certain cards.

This makes such cards less than ideal if you’re looking for more of a “no-fuss” way to earn rewards. Additionally, most tiered and category bonus cards only get you 1% cash back on general purchases. This means that unless you spend heavily in a card’s bonus categories, you could be missing out on maximizing rewards on the majority of your spending.

Flat-rate cards, on the other hand, may offer a lower rewards rate in a specific category like dining or groceries, but will help you score extra rewards on general purchases that don’t fall into a specific category, boosting your average cash back rate overall. This is why it’s also worth considering pairing a flat-rate cash back card with a tiered bonus card that fits your spending habits.

Bottom line

Whether you opt for a flat-rate, tiered rewards or category bonus cash back card, you can enjoy earning cash back on all (or nearly all) of your purchases, often with minimal effort.

You may be surprised at just how much 1% or more cash back adds up to at the end of each month. Just be sure to take a close look at your spending habits and each issuer’s terms to be sure the cash back card you’re considering is a good fit for you.

*2.625% cash back referencing 1.5 points per dollar plus 75% boost for Preferred Rewards program.

**Travel or dining purchases