How do cash back credit cards work?

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In a Nutshell

Cash back credit cards are just one type of rewards credit card, but do you know how they work? We’ll help you find answers to the important question: How can you get cash back on a credit card?

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If you have a cash back credit card, you may be able to earn rewards each time you swipe, dip, tap or otherwise pay for a purchase with your card.

Cash back credit cards can be quite lucrative and offer substantial rewards over time. If you are tired of just paying your credit card bill and want your credit card to pay you, read on to learn about how you might be able to get cash back from credit card purchases.


How does cash back work?

Even though they’re just one type of rewards credit card, cash back credit cards are among the most popular — because they pay you back in cash rewards. Here’s a basic rundown of how they work: Every time you use your card for an eligible purchase (as defined by the card’s issuer), the issuer pays you a percentage of your purchase price back at the end of the statement period or billing cycle.

For example, most cash back rewards cards pay somewhere around 1% to 2% of your purchase in cash back, with some paying as much as 5% cash back. If you have a flat-rate 1% cash back card and spend, say, $1,000 over the course of a statement period (about one month), at the end of the statement period you would have earned $10 cash back.

Miranda Marquit, a credit card expert and personal finance journalist based in Idaho Falls, Idaho, loves that cash back cards can help you save on every eligible transaction. According to Marquit, it’s as though your purchases are automatically discounted every time you make an eligible purchase with a cash back card, since you can earn a percentage back from that purchase.

Depending on the card, you might earn bonus cash back on specific purchase categories or based on specific activity defined in your cardholder agreement. For example, Chase Freedom® offers 5% cash back on up to $1,500 in combined purchases in bonus categories each quarter you activate (then 1% cash back after that), and the Citi® Double Cash Card pays you 1% cash back on each purchase and another 1% cash back when you pay your bill for a total of 2% cash back on every purchase.

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Citi® Double Cash Card

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Ways to redeem cash back

Now that you know how you can earn cash back, let’s look at the redemption side. You generally have a few options to redeem your cash back rewards, depending on the card. Here are some of the most popular options.

  • Statement credit: One of the easiest cash back redemption methods is a statement credit. With a statement credit, you redeem cash back rewards to lower your credit card bill. For example, if you have accumulated $200 in cash back and have a $1,000 bill from your credit card issuer, you’d redeem the $200 cash back on your statement and owe the remaining $800. The simplicity and clear value make it a popular option.
  • Paper check or direct deposit: You may have the option to log into your card issuer’s website and choose to redeem cash back rewards for a paper check, which would be mailed to you. Or you may be able to have the cash deposited directly into your checking or savings account.
  • Redeem for gift cards: Some cards let you redeem your cash back rewards as gift cards for your favorite stores and brands.

Types of cash back cards

There are a few types of cash back credit cards and it’s important to learn how cash back works for each type. Three common types include flat-rate, bonus-category and rotating-category cash back cards.

  • Flat rate: Some cash back rewards cards offer a flat rate of cash back on every eligible purchase. Chase Freedom Unlimited®which offers 1.5% cash back on every purchase, is one example. This type of earning is great because of its simplicity. You don’t have to worry about which card to use at which store because you get the same rewards rate everywhere.
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Chase Freedom Unlimited®

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  • Bonus categories: Some cards offer cash back on specific bonus categories. For example, the Blue Cash Preferred® Card from American Express gives cardholders 6% cash back at U.S. supermarkets (on up to $6,000 per year in purchases, and then 1% after) and 3% at U.S. gas stations and certain U.S. department stores, with 1% back everywhere else. Bonus-category cards can help you earn more cash back than many flat-rate cards, but you have to keep track of where to use the card for the best rewards. 
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  • Rotating categories: Another popular cash back rewards card type comes in the form of rotating categories. Chase Freedom® and Discover it® Card both offer this type of reward. Both of these cards can earn you 5% cash back on up to $1,500 in combined purchases when you activate categories (like gas stations and grocery stores), which change every three months. You can also earn 1% back on all other purchases. These cards are great because you can earn much more, but it is on the cardholder to remember where to use the card and to activate the categories when they change.
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Chase Freedom®

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Because each of these cash back card types works differently, one type may or may not fit your needs or spending style. In some cases, it could make sense to have two cash back rewards cards.

For example, if you have both a flat-rate card and a rotating-category card, you may earn more than if you just used one card or the other for all purchases. However, this also means you’ll have to deal with two monthly credit card bills and their respective minimum payments, and remember where to use each card.


Bottom line

Picking the best cash back credit card for your needs requires balancing how you spend and how you want to earn. Keep the card fees in mind, too — if you pick a card with an annual fee, make sure to do the math to ensure you will earn enough cash back to cover the cost. If you have to pay more in fees (or interest) than you earn in cash back, this type of credit card may not be worthwhile for you.

But if you can commit to paying off your balance in full and on time each month to avoid expensive interest and you keep fees in check, cash back rewards cards can be a great addition to your wallet.

Just make sure you don’t fall victim to the common pitfall of using cash back to justify additional purchases.

“There’s a tendency to say that ‘I get cash back, so I can spend more money,’” Marquit says. “Don’t use your cash back card as justification to spend more than your budget or spending plan allows.”

Some cash back rewards cards require good to excellent credit, while others are available for those with less-than-stellar credit health. To get started, review which cards might make the most sense based on your credit. Then consider whether you prefer a flat-rate card, bonus-category card, rotating-category card or some combination.