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What is a cashback credit card? 2021 beginner’s guide

It's a simple but powerful card that pays you back for your spending.

Cashback credit cards are one of the best options to begin with thanks to their simplicity and rewards on all purchases. With so many cashback cards to choose from, it’s likely that you’ll qualify for one even with no credit history or with a poor credit score.

One thing to keep in mind, however, is the high-interest rates these cards carry. This means if you don’t pay your full balance on time, you will accrue interest, which can easily offset your rewards. To maximize your cashback, try to pay off your credit card balance before it’s due.

What is a cashback credit card?

A cashback credit card is a card that pays you back a percentage of what you spend. Typically, this ranges from 1% to 2%, though it can go as high as 6%. You may earn different percentages based on the types of purchases you make.

Despite their name, cashback credit cards don’t actually pay you in physical cash. Instead, you’ll get your cash back in other forms, such as electronic bank deposits.

How does credit card cash back work?

When you use your credit card for an eligible purchase, you’ll earn a certain amount of cash back — that is, a cash rebate. Your earnings depend on the rates set by your card provider.

Cash back is expressed as a percentage. If your card offers 1% cash back, that means you’ll earn $1 in rewards for every $100 in purchases you make with your card.

Here’s a simple example: Let’s say your card offers 1% cash back on every purchase. You buy a laptop for $1,000. This means you’ll earn $1,000 x 1% = $10 in cash back.

What can I earn cash back on?

If you have a cashback credit card, chances are it’ll offer at least 1% cash back on every purchase. This isn’t always the case, but it’s extremely common.

Some cards will offer different cashback percentages for different purchases, and this is where purchase categories come in. If you don’t want to worry about categories, consider a card that offers the same cash back on every purchase.

Why purchase categories matter

If you use your card to buy a plane ticket, you might classify that as a “travel” purchase. And if you use your card to pay for dinner, you might classify that as a “dining” purchase.

This is essentially what card networks do — they sort your purchases into categories. This is so your card issuer can offer you different cashback rates. For example, you might earn 3% cash back on travel and 4% cash back on dining.

Here are a few examples of credit card categories

  • Travel
  • Dining
  • Groceries
  • Gas
  • Purchases with specific airlines
  • Purchases with specific hotels
  • Entertainment
  • Online purchases

How do card providers decide which categories my purchases fall under?

The four major credit card networks — Visa, Mastercard, American Express and Discover — assign a four-digit number to each business that takes credit cards. This is called a merchant category code (MCC).

Because of MCCs, purchases might fall under different categories than you expect. For example, if you buy groceries at a gas station convenience store (MCC of 5541), you probably won’t earn bonus grocery rewards. Grocery stores usually have an MCC of 5411.

MCCs may vary based on the card network. A business may have a different MCC under Visa, for instance, than under American Express.

Is there a list of merchant category codes?

The IRS maintains a list of merchant category codes. Card networks and some banks have their own MCC listings.

The three types of cashback credit cards

There are many cashback credit cards out there, but they can be sorted into three categories.

1. Flat-rate cash back

You get one cashback rate on all purchases. For example, you might earn 1.5% cash back or 2% cash back on everything you buy, regardless of the purchase category. This type is a great choice if you spend evenly across many categories, or if you don’t want to deal with various cashback percentages. The Citi® Double Cash Card is a great example of a flat-rate cashback card.

Flat-rate cashback card
Citi® Double Cash Card

Citi® Double Cash Card logo
Finder Rating: 3.8 / 5

★★★★★

Credit recommended (670-850)
Apply now
on Citi's secure site
670
Min. credit score
$0
Annual fee
Up to 2%
Cash back
n/a
Welcome offer
The Citi® Double Cash Card lets you earn 1% back when you make the purchase and another 1% back when you pay it off for a total of 2% back on all purchases without category restrictions. This slightly higher than other flat-rate cashback cards, which come with a 1.5% back on all purchases. But it’s lower than what tiered cashback cards or cards with rotating categories earn on select types of purchases.
  • Simple rewards structure. You dont have to worry about maximizing your cash back on select categories. No matter what you buy, you earn a flat 1% back when you make the purchase and 1% back when you pay it off for a total of 2% back on all purchases.
  • No accelerated categories. You earn flat rewards on all purchases. This can be a poor choice if you spend heavy on categories like gas, groceries and dining. Thats because other cards offer between 3% and 6% back on these categories.
Annual Fee $0
Purchase APR 13.99% to 23.99% variable
Balance transfer APR 0% intro for the first 18 months (then 13.99% to 23.99% variable)
Welcome offer N/A
Estimated welcome offer value
Rewards Up to 2% cash back on purchases (1% when you buy plus 1% as you pay)

2. Tiered cash back

This card has multiple cashback rates. For example, it might offer 3% cash back on gas, 2% on groceries and 1% on everything else. If you spend heavily in certain categories, a tiered cashback card might offer lucrative rewards. Check whether your spending lines up with a card’s bonus categories.

Tiered cashback card
Blue Cash Everyday® Card from American Express

Blue Cash Everyday® Card from American Express logo
Finder Rating: 4.6 / 5

★★★★★

Credit recommended (670-850)
Apply now
on American Express's secure site
Rates & fees

670
Min. credit score
$0
Annual fee
Up to 3%
Cash back
$100
Welcome offer
The Blue Cash Everyday® Card from American Express lets you earn up to 3% cash back on select categories you'll earn as statement credit. However, the higher cashback rates have an annual cap on the amount of cash back you can earn.
  • Tiered cash back. Earn 2% back at US gas stations and some US department stores, and 3% back US supermarkets on up to $6,000 per year. After reaching the cap and on all purchases, you earn 1% back.
  • Low cashback rate on other categories. All purchases that dont fall in the 2% and 3% cashback categories earn 1% back. This is lower compared to flat-rate cards where you can earn either 1.5% or 2% back on all purchases.
Annual Fee $0
Purchase APR 0% intro for the first 15 months (then 13.99% to 23.99% variable)
Balance transfer APR N/A
Welcome offer 20% back on Amazon.com purchases in the first 6 months for up to $150 back, plus $100 statement credit after spending $2,000 within the first 6 months
Estimated welcome offer value $200 based on Finder's valuation
Rewards 2% at US gas stations and select US department stores, 3% at US supermarkets on up to $6,000 per year, then 1% after that and on all other purchases (redeem as statement credit)
Terms apply to American Express benefits and offers.
Cash Back is received in the form of Reward Dollars that can be redeemed as a statement credit.

3. Rotating-bonus-category cash back

This card offers 5% cash back in specific categories during some months. In other months, it offers more cash back in new categories. You may have to opt-in each rewards period with this rewards type. Given its changing rewards structure, it’s not for everyone. But you can earn a good amount of cash back if you spend in the right categories.

If you’d like to learn more about these card types, check out our guide to cashback credit card types.

Cash back on rotating categories
Chase Freedom Flex℠

Chase Freedom Flex℠ logo
Finder Rating: 4.7 / 5

★★★★★

Credit recommended (670-850)
Apply now
on Chase's secure site
Rates & fees

670
Min. credit score
$0
Annual fee
Up to 5%
Cash back
$200
Welcome offer
This card earns a high cashback rate on categories that rotate each quarter, such as Amazon.com purchases, Walmart, wholesale clubs, streaming services, grocery stores and more. There are still cashback rewards for all other purchases.
  • High cashback rate. Earn 5% cashback on rotating categories on up to $1,500 each quarter and 1% back after reaching the cap. Chase is generous with other categories, so you earn 5% back on Lyft rides until March 2022, and travel purchases made through Chase Ultimate Rewards. You also earn 3% back at restaurants, including takeout and delivery, and on drugstore purchases. Everything else earns 1% back.
  • Lower cashback rate on other categories. You earn 1% back on purchases that dont fall into the accelerated cashback categories.
Annual Fee $0
Purchase APR 0% intro for the first 15 months (then 14.99% to 23.74% variable)
Balance transfer APR 14.99% to 23.74% variable
Welcome offer $200 after spending $500 in the first 3 months
Estimated welcome offer value $200 based on Finder's valuation
Rewards 5% back in rotating categories up to $1,500 combined each activated quarter (then 1%), 5% on travel purchased through Chase, 3% on dining and drugstores, and 1% on all other purchases

Compare cashback credit cards

Compare your options to find the cashback card that’s right for you.

Name Product Filter values Rewards Purchase APR Annual fee
Blue Cash Preferred® Card from American Express
6% on select US streaming services, 3% on transit and US gas stations, 6% at US supermarkets on up to $6,000 annually, then 1% after that and on all other purchases (redeem as statement credit)
0% intro for the first 12 months (then 13.99% to 23.99% variable)
$0 intro annual fee for the first year ($95 thereafter)
Perfect for families: Earn up to 6% cashback as statement credit on everyday purchases and a big welcome offer for a cashback card. This heavy-hitter rewards card has uncontested value. Terms apply, see rates & fees
Blue Cash Everyday® Card from American Express
2% at US gas stations and select US department stores, 3% at US supermarkets on up to $6,000 per year, then 1% after that and on all other purchases (redeem as statement credit)
0% intro for the first 15 months (then 13.99% to 23.99% variable)
$0
This everyday cashback card offers a higher than average welcome offer for no annual fee, letting you earn 20% back on Amazon.com purchases in the first 6 months for up to $150 back, plus $100 after you spend $2,000 in the first 6 months. Terms apply, see rates & fees
Chase Freedom Unlimited®
5% cash back on travel purchased through Chase, 5% on Lyft, 3% on dining and drugstores and 1.5% on all other purchases
0% intro for the first 15 months (then 14.99% to 23.74% variable)
$0
This solid 1.5% cashback card gets even better with the addition of up to 5% back in categories like travel, drug stores and dining.
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Compare up to 4 providers

Typical cashback credit card features

  • Annual fee. For most cashback cards, you won’t pay an annual fee. This differs from travel cards, which offer points or miles and often have annual fees.
  • Signup bonus. Many big-bank cashback cards have signup bonuses, with a typical value of $150. However, many other products don’t offer bonuses, particularly cards from credit unions.
  • Redemption options. You may be able to redeem cash back for statement credit or deposits to your bank accounts. Other rewards may include merchandise, gift cards or travel rewards.
  • Intro APR. Competition is fierce among big banks, who typically offer intro APRs on balance transfers for at least 12 months. Some even offer intro APRs on purchases.
  • Base cashback rate. If your card offers elevated rewards, it’ll probably offer a base cashback rate for all other purchases. For example, it might offer 3% cash back on gas and a base rate of 1% back on all other spending.
  • Purchase protection and extended warranties. These come standard with many cashback cards, as most products are issued by Visa or Mastercard.

How do I redeem cash back?

You’ve had your card for a while and patiently built your cashback haul — now, how do you redeem your rewards?

Typically, you can log in to your online credit card account and redeem cash back through your rewards portal. Your provider will also likely have a phone number you can call for redemptions.

Cashback redemption options

What you can redeem cash back for depends on your provider.

Some providers redeem your cash back automatically and apply it to your account as statement credit. Others let you trade cash back for a variety of redemptions, which might include:

  • A deposit to your bank account.
  • Gift cards.
  • Merchandise.
  • Travel such as airfare and hotel bookings.
  • Charitable donations.

Your provider may set a minimum of cash back you must earn before redeeming. A common minimum is $25.

What is statement credit?

Statement credit reduces the balance you owe. For example, if you have a $1,000 balance and get a $100 statement credit, you now owe just $900.

Your minimum payment due typically isn’t affected by statement credit. That means when the $100 is applied to your account, you’ll still have to pay at least the full minimum amount due.

Alternatives to cashback cards

A cashback credit card is an excellent option as your first card, or if you want simple rewards.

If you want more powerful rewards, the next step is getting a travel credit card. It’ll offer points or miles you may be able to use for a variety of redemptions, including flights and hotels, gift cards, experiences and more. And the best cards offer premium perks such as travel credits, hotel and airline elite status, airport lounge access and more.

Bottom line

A cashback credit card can be a lucrative product. You’ll typically pay no annual fee for it, and you can earn great rewards for your everyday purchases. To find the best cashback product for you, consider how much you want to pay for your card and which categories you spend most in.

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