What is Cashback and How Does It Work?
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Summary:
A cash back credit or debit card, also known as “cashback cards,” refunds customers, in cash, based on a percentage of the money they spend. Some cards have a flat cash back rate while others offer higher percentages of cash back for different spending categories. Cash back rewards programs offer different ways to redeem your cash, such as depositing it directly into your bank account or using it as a statement credit.
Award programs associated with credit cards are nothing new. Though their original iterations usually allowed for rewards points or miles that could be used for airline tickets or other purchases, some reward programs now simply offer cash rather than points.
Card companies quickly realized that many consumers would rather be earning cash with their purchases than miles or points that they might never get around to using before they expired. But how does this reward system work? Let’s take a look at the various ways in which you earn and redeem rewards with your cashback card.
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What is cashback?
To clarify, cash back can also refer to using a credit or debit card at a merchant’s store and receiving cash back on the spot, which is added to your total. For the purposes of this article, we are focusing on cash back from a credit card, not a debit card.
Essentially, cash-back rewards programs are a way to earn cash just by making everyday purchases. Most commonly, every time you use your cashback cards, whether it’s at department stores, grocery stores, or shopping online, the rewards program gives you a percentage of that money back. You can usually expect to get between 1% to 5% back, depending on the reward program your cash back credit card offers.
How cash-back rewards programs work
Some card companies allow you to earn rewards on all your purchases at a single flat rate. For example, you may get 1.5% in rewards points, which means you’re earning 1.5 cents per dollar you spend. Some competitive rewards card companies offer even higher percentages of cash back. However, there may be limitations or restrictions on the rewards programs, such as caps on how much cash back you can get.
Other credit card issuers may have varying ways to earn cash back. For example, you could get 1% back for most purchases, but a higher percentage for specific spending categories such as gas station purchases or restaurant meals. How much cashback you get can depend a lot on where you shop too, especially if there are merchant agreements between the card issuer and certain retailers or restaurants.
If you’re applying for a new account, you might even get a sign-up bonus, such as an introductory rate of 5% for combined purchases up to $1,000 or $5,000, for example. That being said, you may need to spend that money within a specified period of time to receive that cashback feature, which could be a drawback for some consumers.
If you don’t currently have a credit card with a cash back feature, take a look at some of the options below. You can compare introductory deals and cashback features to find the ideal card for your spending habits.
Redeeming your cash rewards
Credit card companies have different rules about how you can redeem your cash rewards, but here are a few of the ways you may be able to receive your cash back.
Statement credits
If you have no particular use for the money, you could just use the cash back to go towards your credit card bill. This also might be your most sensible option if you are carrying a balance on your credit card and want to whittle away at that interest.
Bank deposit
If you prefer to take the cash, you may want the credit card company to make a direct deposit to your checking account, issue a prepaid debit card, or send you a check in the mail. Some credit card companies may require a minimum balance before you can cash out, so you’ll want to check the details of your particular credit card account.
Online purchases
Your cash back credit card may have an option for you to put your cash back directly towards your online purchases. This could be a good idea for you if you spend a lot of time shopping on Amazon or other popular online retailers, for example.
Gift cards
Different reward programs vary, but some credit card companies will give you the opportunity to redeem your cash rewards in the form of a gift card, which is essentially a prepaid debit card to a specific store. You might like this choice if you often give gift cards as presents — killing two birds with one stone, if you will.
Charitable donations
Some cash back credit cards will allow you to donate your cash back rewards to charity. This can be a nice way to give back to your community or contribute to causes you care about, such as cancer research, homelessness, or your favorite pet shelter.
Even if your specific cash back credit card doesn’t facilitate charitable donations, you could still get the cash back deposited in your bank account and send a check to the charity of your choice.
Other uses for cash back rewards
The beauty of cash back credit cards is that your credit card company can’t decide where you put that money. All the cash is yours, after all. Here are a few other ideas to put that money to good use.
Pay off high-interest debt
Even if you’re not carrying a balance on your cash back credit card, you may want to use your cash rewards to help pay down another credit card or other debts. Since it’s essentially “free money” why not use the extra cash to pay down the principal on your car or student loan?
Build your emergency fund
If you don’t have one already, you should definitely start an emergency fund. Life throws a lot of emergencies, both large and small, at us — broken furnace, car repairs, or an expensive vet bill, for instance. Using your cash back to build or grow your emergency fund is a great use for that extra money and will enhance your security as well.
Invest for your retirement
Even small amounts of money can grow over time and help you to create a nest egg for your future. Taking your cash back rewards and putting them into an existing retirement fund or brokerage account is an excellent way to invest in your future.
Don’t have a brokerage account? Each of the brokerages below can help you invest for your future by specifically looking at retirement accounts.
Save for other purchases
Maybe you’re saving for a down payment on a car, need a new roof, or want to plan a sweet vacation. You can use those cashback rewards to open a savings account and start moving towards those financial goals.
If you don’t think you’re getting the most from your current savings account, consider opening a new account with one of the vendors below.
Choosing the right cash back rewards program
A lot of credit card companies offer cashback programs, but you’ll want to look at their other features as well before deciding which credit card to apply for.
Annual fees
Not every card issuer charges an annual fee, but be wary if they do. A cash back card that comes with a yearly fee may end up costing you more than you can earn with a cashback bonus, which defeats the purpose entirely.
Having said that, if you use your card pretty regularly, that annual fee may not be a problem for you, especially if it comes with a lower interest rate than similar credit cards.
Review your spending habits
Are you the type to rarely use your card and pay your balance in full every month? Or do you intend to make some major purchases that you’ll need a little more time to pay off? Asking yourself these questions will help you choose the card that’s right for you, such as one with a lower interest rate.
Check for limitations on cash rewards
Some cards have caps on how much you can earn in cashback rewards. If you use your cards pretty sparingly, this may not be a problem for you. On the other hand, if you intend to spend pretty aggressively, you might want to find a cashback card that has unlimited rewards.
Spend mindfully
Keep in mind that just because you can earn cash back for your purchases doesn’t mean you should use it as an excuse to spend money you don’t have. It’s a nice perk when you plan on using your credit card anyway, but you’re never going to make up for high interest rates if you overspend and carry a large balance on your credit card.
If you need help getting a handle on your credit card spending habits, you might want to talk to a financial advisor. You can also check out this helpful guide put out by the Consumer Financial Protection Bureau.
FAQs
Do cashback rewards expire?
In most cases, you don’t need to worry about your rewards expiring. Typically, they will only expire if you or the card issuer closes the account.
However, if there is a long period of inactivity on your account, it’s possible your reward dollars could lapse. If you use your card at least occasionally and remain in good standing, you should be able to continue receiving your cashback rewards indefinitely. But before you assume all cards are the same, check what your card issuer’s policy is on cashback rewards.
Is cashback free money?
Essentially, it is free money, but you’re spending quite a bit to get that free money. For example, if you get 1.5% cash back, you only make $15 for every $1,000 you spend. Plus, as previously mentioned, cash back credit cards should not be used as an excuse to spend money indiscriminately.
With that in mind, it is a nice perk if you’re going to use credit cards anyway. And you could put that money to good use, like adding to your savings or investment account or giving it to charity.
Is a cashback credit card better than other credit cards?
That all depends on what your needs are. If you go on a lot of vacations, you might be better off getting a travel card that awards miles or points for flights or hotel rooms. In another light, if you plan on carrying a credit card balance, you might want to get one that gives you cash back and carries a lower interest rate.
Key Takeaways
- A cash back rewards card is a credit card benefit that allows customers to get refunded for a percentage of the money they’ve spent on the card.
- Card issuers may offer cashback as a flat percentage of purchases or it may vary by different rewards categories, such as gas station or grocery store purchases.
- Some card companies limit how much cash you can get back; others have unlimited cashback rewards.
- You can receive your cash back in a variety of ways, like in the form of gift cards or deposited directly into your bank account.
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