They’re simple but powerful cards that reward you for your spending.
If you’re looking for your first rewards product, a cashback credit card is a solid choice. It can be much simpler than a travel card and you might not pay an annual fee for it. You can also be rewarded handsomely for your day-to-day spending.
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What are cashback credit cards?
With cashback credit cards, your card provider pays you back a small portion of what you spend.
Despite their name, cashback cards don’t necessarily pay you in cash. You’re more likely to get your rewards in the form of a credit to your account or a deposit to a bank account.
How do cashback credit cards work?
Cash back is expressed as a percentage. For example, your card might offer 1% cash back on all purchases. That means you earn $1 in rewards for every $100 in purchases you make with your card.
Here’s another example: Let’s say your card gives you 2% cash back on all purchases. If you spend $1,000, you’ll earn 2% of that in cash back, or $20.
How do I redeem cash back?
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.
Cashback redemption options
So, what can you redeem cash back for? This depends on your provider.
Some providers redeem your cash back automatically and apply it to your account as statement credit. Others let you redeem cash back for a variety of rewards, which might include:
- A deposit to your bank account
- Gift cards
- Travel rewards such as airfare and hotel bookings
- Charitable donations
What is statement credit?Statement credit reduces the balance you owe. For example, if you need to pay off $1,000 in purchases and you get a $100 statement credit, you now owe just $900.
Your minimum payment due isn’t typically 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 that’s due.
Your provider may set a minimum of cash back you must earn before redeeming. A common minimum is $25.
The 3 types of cashback credit cards
There are many cashback credit cards out there, but they can be sorted into three neat categories.
- Flat-rate: You get one cashback rate on all purchases. For example, you might earn 1.5% cash back on everything you buy, regardless of purchase category.
- Tiered: The card has multiple rewards rates. It might offer 3% cash back on gas, 2% on groceries and 1% on everything else.
- Rotating-bonus-category: The card offers more 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.
If you’d like to learn more about these card types, check out our comprehensive guide.
The 3 types of cashback credit cards, explained
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.
Benefits and drawbacks of a cashback credit card
- Easy to gauge the value of your rewards.
- Automatic cashback redemption for some cards.
- A tiered-cashback card can reward you handsomely if you spend heavily in certain categories.
- Typically, you’ll pay no annual fee.
- Might not be able to redeem for travel rewards.
- May need to activate bonus-reward categories, especially if you have a rotating-bonus-category card.
How to make the most of a cashback card
- Pay off your balance in full when possible. If you keep a balance on your card, you’ll accrue interest if you don’t have a 0% intro APR. Though you’ll earn rewards on your spending, they’ll effectively be reduced due to your interest payments.
- Choose a card that aligns best with your spending habits. If you spend evenly throughout many categories, you might like a flat-rate cashback card. If you spend heavily in certain categories, you might benefit from a tiered-cashback or rotating-bonus-category card. Do the math and consider the rewards you’ll earn.
- Keep an eye on fees that may eat into your rewards.The first one to watch out for is the annual fee. Look out for balance transfer fees, especially if you want to take advantage of your card’s intro APR. And try to avoid fees for cash advances, foreign transactions and late and returned payments.
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 which categories you spend most in.