How Does Cash Back Work On A Credit Card?

Credit cards offer a multitude of rewards based on spending. One such reward, cash back, has actually been around since 1986, back when cards were still processed through carbon copy imprints. With regards to credit cards, cash back typically means a cardholder getting a small percentage of certain transaction amounts refunded back to them—i.e., free money. 

There are several ways cash back rewards work on credit cards, as far as: what percentage is refunded, how the refund gets to the consumer and how merchant partnerships make it more advantageous to shop at certain businesses. 

In broad terms, there are three types of cash back credit cards: flat-rate, tiered and rotating. A flat-rate means consumers get a single percentage rate of cash back on every purchase, no matter the amount, although most cash back offers typically start at $25. A tiered card offers different cash back percentages for different purchase types, meaning a consumer could get a higher refund rate on gasoline compared to groceries. 

Finally, a rotating card offers consumers different cash back rewards every three months, promoting different merchant types with higher refund rates. Cash back rates usually range from 1% to 3%, but can go as high as 5% on special rotating offers.

Cardholders can receive cash back in a few different ways. Many consumers choose to have their refund applied towards their credit card balance, but they can also have the funds deposited into their transferable bank account. In addition, cardholders can request a good old-fashioned check. 

Some credit cards also offer cash back in hand, which is more common with debit cards. This option is not a reward, however, as a cardholder is simply receiving a selected cash amount at checkout, which is applied to their credit card account balance (i.e., it’s not a refund). 

As stated above with rotating cash back offers, credit cards partner with different merchants to offer special, high-rate cash back rewards to consumers. These offers encourage consumers to shop at the merchants chosen during the promotional periods. 

It’s important to note that these promotions are different from credit card rewards points, in which cardholders accumulate spending points that can only be used for certain expenses through the card issuer (e.g., airplane tickets, hotels, etc.) Cash back is literally cash and can be spent on anything. 

Not all cash back options are created equal. It’s important consumers better understand cash back offers so they can fully reap the rewards. Fiona is a financial search engine that matches applicants with personalized credit card offers featuring cash back, to best suit their financial needs.