These days, no one leaves home without their credit cards, with the average American carrying around 3.84 cards in their wallet, according to Experian. And if youre one of them, you could be earning rewards for using your plastic. When you use a cash-back credit card, you can earn money back on each purchase you make, with little effort on your part.
Yes, that can mean more money in your pocket, but these cards wont pay off for everyone. If you carry a balance from month to month, the interest charges on your cash-back credit card are likely to outweigh the rewards. Heres a closer look at how to get cash back with a credit card and maximize your earnings.
What is cash back on a credit card?
Similar to a rebate or a refund, a cash-back credit card gives you money back for every purchase you make.
These cards typically reward you a flat percentage of each dollar spent (often, 1% or 2%) and sometimes have special categories with bigger rewards. For example, you may earn an additional 1% to 5% cash back for spending at grocery stores or gas stations.
No matter the purchasebig or smallyoure always earning, which is really what makes cash-back credit cards so valuable, says Brent Reinhard, general manager of Chase Freedom. Its important to note that some cards do have caps on how much cash you can earn annually, or how much you can earn in certain categories.
Cash-back credit cards function similarly to regular credit cards in many ways, but there are a few unique features to consider before applying for one of these cards:
- You may need good orexcellent credit to qualify.
- Some rewards are capped at a set dollar amount per earning period.
- There may be a minimum balance requirement to redeem your rewards.
- Some creditors require you to enroll in certain earnings categories.
- Rewards may expire, become unavailable, or be forfeited if your card is canceled or if payment is past due.
Cash back vs. cash advance
The terms cash back and cash advance may sound interchangeable, but theyre actually quite different. Cash back is a reward you earn for using some credit cards, while a cash advance is a type of loan against your available credit.
An advance allows you to pull out a lump sum of cash, and the amount is added to your credit card balance. Youll likely be charged a higher interest rate for a cash advance than you will for a credit card purchase. Interest also begins accruing the date you take the advance through the date you pay back the full balance. Youll also pay a transaction fee of around 3%.
For those reasons, cash advances should be treated as a last resort in a financial emergency.
Ways to earn cash back
With a cash-back credit card, the key to earning rewards is using the card strategically.
Put every purchase that you can on your card, while still being able to pay off your balance in full every month, says Eric Schuppenhauer, head of consumer lending at Citizens Bank. Look for opportunities to put recurring transactions, like car insurance or monthly subscriptions, on your credit card so you can maximize the cash-back rewards.
Each cash-back credit card has a different rewards structure, so you can also maximize your earnings by occasionally reviewing the terms of each card you own and spending accordingly. For example, one card might offer 3% back on travel purchases and 1% back on everything else, while another might offer a flat 2% back on all purchases. So it makes more sense to put your regular expenses on the latter. The most common mistake is not making sure you reassess the benefits youre getting with your card at least once a year, says Schuppenhauer.
Depending on the card and its current benefits, you could potentially earn cash in a number of ways.
Everyday purchases
With just about every cash-back credit card, youll earn a flat percentage of cash back for every eligible dollar you spend. Most purchases are eligible for rewards, but you wont get cash back for other types of card activity, such as returns, refunds, credits, balance transfers, fees, and interest charges.
Bonus categories
In addition to cash back for every dollar spent, some credit cards offer tiered rewards structures that give you more cash for certain bonus categories. These categories may be fixed, or they may rotate quarterly. Examples of bonus categories include:
- Restaurants
- Travel
- Grocery stores
- Pharmacies
- Gas
- Wholesale clubs
Sign-up bonus
Some card issuers offer extra rewards for opening a new card. A sign-up bonus allows you to receive a one-time cash bonus or higher earnings rate for spending up to a set dollar amount within a specific time frame. For example, you might receive an extra $300 in cash back by spending $2,000 on the card within the first three months.
Referral bonus
With referral bonuses, the card issuer gives you extra cash back each time you refer a new customer who opens one of their cards. With some cards, you might be eligible for multiple referral bonuses per year.
How to redeem cash back rewards
There are often several ways you can redeem your cash back rewards. Before redeeming, read the credit cards terms and pay attention to special promotions.
How someone chooses to redeem their cash back is personal and may change month to month, says Reinhard. From offsetting common expenses or taking advantage of discounts on travel or gift card redemptions, there is a lot of flexibility in how a cardmember can redeem cash back.
Heres a closer look at some of the most common options.
Get a statement credit
One way to redeem cash back rewards is by having them credited back to your account. This reduces your outstanding balance. However, its important to note that a statement credit does not go toward any minimum payment due.
Pros
- Convenient
- Reduces your outstanding balance
Cons
- Cant be applied to specific purchases
- Takes several business days to post
Request a paper check
If you want to physically receive your cash back, you can request to have a check mailed to you. This gives you cash in hand to spend however you please, though it can take a while (up to 14 days or longer) to receive the check.
Pros
- Use the cash for any purpose
Cons
- Takes several business days/weeks to receive
- Check must be processed before redemption
Receive a direct deposit
A more efficient way to receive your cash is to set up direct deposit. This way, your cash-back rewards are sent straight to your bank account, where you can use the funds to pay bills, make purchases, or make a withdrawal at an ATM. Its quicker than waiting for a check, but not instantaneous.
Pros
- Convenient
- Use the cash for any purpose
Cons
- Takes several business days to receive
Make a purchase through the issuers shopping portal
Most major card issuers have their own shopping portals, where you can log in and purchase directly from retailers and brands theyve partnered with. Here, you can use your cash-back rewards as your form of payment, and they may have an increased value. However, you may not be getting the best price in general, and may be able to save money by shopping around independently.
Pros
- Special discounts may be available
Cons
- Promotional items may be priced above market value
- Rewards may not be credited until after purchase and cant be refunded if you make a return
Request a gift card
Finally, you may have the option to exchange your cash-back rewards for a gift card. Again, you may have access to special deals or discounts if you go this route. It can be a good option if you do a lot of shopping with a particular retailer, like Target or Amazon.
Pros
- Incentives or discounts may be available
Cons
- Limited to use with specific retailers
- Rewards value may be lower than purchase price
Do you have to pay taxes on cash back?
The IRS treats cash-back rewards as rebates and not as income. That means you dont have to report cash back to the IRS and wont have to pay taxes on your rewards.
How to choose the right cash back card for you
Each cash-back card is different, so its important to compare card terms before applying. If youre not sure which card is best, Reinhard advises choosing one that empowers savvy spending.
When applying for a cash-back credit card, consumers should look for a card that offers a strong earn on all of your spending and the chance to plus up in certain categories, he says. This helps customers maximize their earningseven better if the credit card has no annual fee and offers a 0% introductory APR.
Some cash-back cards might also be worth skipping if you travel overseas frequently, since you could incur a foreign transaction fee of roughly 3% on each purchase.
To recap, some features to look for when choosing a cash-back card include:
- Low or no annual fee
- Rewards for your most frequent or most expensive purchases
- No or low rewards earnings caps
- Multiple options for redeeming rewards
- Low or no foreign transaction fee
- Low APR
And while a cash back card can help you earn money for purchases, its important to understand these cards arent right for everyone, particularly those who carry a balance.
The average APR on a credit cardwhich is now above 20% according to the Federal Reservefar outweighs the roughly 1% to 6% you can earn in rewards. For that reason, you shouldnt use a cash-back card unless you plan to pay your full balance each month.
The takeaway
Cash-back credit cards arent the only cards you can use to earn rewards, but unlike points cards and travel cards, the value of a cash-back reward is often quite clear.
If you know youll pay off your full account balance each billing cycle, a cash back card can be a great tool for earning extra money on spending you already need to do. If not, a cash-back debit card could be a good alternative.
