Who doesn’t buying things? Even if you’re the type of person to compulsively purchase items you may not need, there’s no reason you shouldn’t get some cash back while you’re at it.
In this post, we’re going to show you how you can spend money while earning cash back for all of your purchases. Cash back credit cards can be one of your greatest assets as long as you choose the right one for you. Keep reading to learn How Do Cash Back Credit Cards Work?
Table of Contents
What Is A Cash Back Credit Card
Basically, cash back credit cards pay you back a certain percentage of whatever you spend. Generally, the rate for cash back is between 1% to 2%. For example, if you spend $1,000, you will earn $10 back.
This sounds good, right? Well lucky for you, more than half of the companies offering rewards credit cards will have a cash back option too. Each cards comes with their own benefits and they can range from building your credit, covering expenses, or grow your savings.
How Do Cash Back Cards Work?
Signing Up. Before you make any moves, do some research on some cards that will benefit you the most. Choose a card that matches your spending habits. If you like travelling, apply for a card that offers cash back on any travel based purchases, or if you frequently shop at a specific store, apply for that store’s cash back card. Keep in mind that you must use your card consistently.
Sending out multiple applications may increase your chances of being accepted, but it will hurt your credit score. Since we’re on the topic of credit scores, there are certain cash back credit cards that require a high credit score to be accepted. Some cards even offer a sign up bonus upon being accepted, however you must be weary because the higher the bonus, the more you must spend to get the bonus. At the end of the day, the safe pick is to select a card that offers a sign up bonus and a higher percentage of cash back rewards.
Annual Percentage Rate (APR). One of the most important things about having a cash back credit card is its annual percentage rate or APR. This is similar to the interest rate on other credit cards. The APR is a charge the credit card company will send you if you don’t pay your balance in full and on time per year. Depending on the amount of APR, it could cancel out any rewards you earn. Some cash back cards, not all, that offer a high percentage of cash back rewards may have an above average APR. As long as you keep your balance paid per month, you’ll be solid.
Fees. Many cash back cards are fitted with an annual fee of between $50 to $100, and cards with higher annual fees tend to have higher percentages of cash back rewards. If you’re wondering if it’s worth it, figure how much you think you’ll spend and how much cash back you’ll earn. The cash back you earn might be high enough to offset the annual charge. Another thing to look out for are the foreign transaction fees, which comes when you’re making purchases while travelling abroad. If you tend to travel or shop internationally, choose a cash back card that offers a small or no foreign transaction fee.
Earning Points. Most cards offer you points that will convert into a cash back amount, but each card is different. Here is what you should look out for.
- Point Caps. Each cards has their own “point cap” or limit of points you can earn in a month, quarter, or year.
- Refunds and “cash value” perks. At some point, you might come across a credit card that offers rewards like a cash back credit card, but gives you something like a gift card instead of points. These cards are good if you think you’ll use these rewards.
- More cash back on certain purchases. Some cards offer accelerated earnings or a higher percentage of cash back rewards when making certain purchases. The most common ones are gas and groceries but can include things like airlines, hotels, restaurants, parking, and more. Note, some rewards credit cards only offer rewards from certain establishments from the categories mentioned.
- Registering Online. One of the easiest things to forget is registering your card online so that you can actually earn the rewards. For any reward bonuses or promotions you’re interested in, sign up before the deadline. Basically, read the correspondence from the credit card company carefully!
Payback Rates. Cash back credit cards offer a certain percentage of what you spend as a cash back value or reward back to you. Most cards offer 1%-2% cash back, but the large variety of cards out there now have varying amounts. Here are some of the possibly ways payback rates can be structured.
- Flat Rate. This style gives you the same percentage of cash back no matter how much you spend or where you earned it.
- Different rates from different categories. Some cards offer a higher percentage of cash back rewards in certain categories. Often 5-6 percent, there is usually a limit on how much you can earn per year.
- Rotating categories for higher rewards. Some cards rotate the category that can earn a higher percentage cash back every quarter to give their customers some variety. You must sign up or register your card to
- Cards with variable rates aren’t always a better deal. If you know you’re going to make a big purchase during a certain period, then cash back credit cards can earn you a lot of points back. However, if you are just going to save, then these cards may cost you more than you earn.
Redeeming Points. You have a couple of choices when it comes to how you want to receive your rewards. Here are some of the ways you could receive your rewards.
- Mail a check.
- Send a direct deposit to your account.
- Applying the rewards to your credit card balance.
- Getting a gift card such as Walmart.
- Donate to a charity of your choice.
Generally, most cards will let you choose from two or more channels of redeeming your rewards. Once you’ve decided that you want to redeem for your rewards, head to the card’s website or call their customer service center.
The frequency in which you receive you rewards will vary depending on the card but some pay right away. Others will pay you once you reach a minimum of $20.
Keep in mind that some cash back rewards have an expiration date, so it’s important that you take a look at the card’s expiration or forfeit policy. There are several cards that have no expiration date, so you can hold onto the points as long as you keep your account active.
Ways To Redeem Cash Back
Now that you know all the ins and outs of credit card, it’s time to look at how to redeem your rewards. Like we mentioned above, there are a couple of options you can choose from when you’ve decided to redeem. Here are some of the most popular options:
- Statement Credit. One of the easiest ways to receive your cash back, you can use this method to lower your credit card bill. The simple and clear form is what makes it a popular option.
- Paper check or direct deposit. To see if you have this option, log into your issuer’s website or app. With this option, your check will be mailed to you. Also, you have the option for this check to be deposited directly into your bank’s checking or savings account.
- Redeem for gift cards. Some cards will allow you to redeem your cash back towards gift cards from your favorite stores and brands.
Consider A Cash Back Credit Card If
- You have good credit. You can still get a decent card if you have an average credit score, but if you have an excellent credit score, you can get a better cards with better rewards.
- You are able to pay your balance each month. To keep your earned rewards and your APR from increasing, you must pay your credit card balance in full per month.
- You are consistent with your spending habits. This isn’t as essential, but if you go to the same stores and get gas at the same places, those places can rack up higher rewards.
|Best Credit Card Categories|
|0% APR||Airline Rewards||Balance Transfer|
|Cash Back||Hotel Rewards||Military|
|No Annual Fee||No Foreign Transaction Fee||Premium|
|Small Business||Student||Travel Rewards|
Cash Back Credit Cards can be a great asset and save you money in the long run when used properly. The rewards can go towards some of your hobbies such as entertainment or travel.
Use our guide above to figure out which card gives you the most benefit. If this post interested you, check out our list of the best Credit Card Bonuses to find the cash back credit card for you, here on HMB!