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What is a cashback credit card? 2020 beginner’s guide

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

Updated

Fact checked

Our pick for a cashback credit card: Blue Cash Preferred® Card from American Express

Blue Cash Preferred® Card from American Express logo

Up to 6%

Cash back

  • Industry-leading cash back on everyday purchases
  • Huge limited-time welcome offer and $0 intro annual fee for the first year (then $95)
  • Limited-time offers expire December 10, 2020
Apply now
See rates & fees
If you’ve been asking yourself, “What is a cashback credit card, anyway?” you’re not alone. Those just getting started with credit cards will hear about this product type all the time. And in fact, it’s one of the best cards to begin with thanks to its simplicity.

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.

Picture not describedThe Capital One® QuicksilverOne® Cash Rewards Credit Card is a common cashback card.

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.

Flat-rate cash back

You get one cashback rate on all purchases. For example, you might earn 1.5% cash back on everything you buy, regardless of the purchase category.

  • When to pick a flat-rate cashback card. A flat-rate cashback card is a great choice if you spend evenly across many categories, or if you just don’t want to deal with various cashback percentages. Many credit card beginners start with flat-rate products due to their simplicity.

Picture not describedThe Citi® Double Cash Card offers the same cashback rate on every purchase.

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.

  • When to pick a tiered cashback card. 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. Also, consider whether you’ll earn more rewards on your entire spending with a simple flat-rate cashback card instead.

Picture not describedWith the Bank of America® Cash Rewards Credit Card, you’ll earn different cashback rates in certain categories.

Rotating-bonus-category cash back

This 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.

  • When to pick a rotating-bonus-category cashback card. Consider this card type if you’re excited by the prospect of earning bonus rewards for new categories every few months. 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.

Picture not describedThe Chase Freedom Flex℠ offers 5% cash back in quarterly rotating categories on up to $1,500 in combined purchases each activated quarter, then 1%.

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

Which cashback credit card should I get?

After you’ve decided what type of cashback card you want, it’s time to compare products. There are several factors to think about. But to start with, you may want to focus on two big considerations:

  • Do you want to pay an annual fee?
    For some of the most powerful tiered-cashback cards, you may pay an annual fee of around $95. However, you can find many excellent cashback cards — especially flat-rate products — without annual fees.
  • What do you usually spend on?
    Look at your annual spending and think about what categories it falls into. Certain cashback cards will reward you most depending on your purchases.If you’re lost, remember that flat-rate cashback cards work very well for the majority of people.

Compare cashback credit cards

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
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: Get up to 6% on everyday purchases and a welcome offer worth $300. This heavy-hitter rewards card has uncontested value. Rates & fees
Blue Cash Everyday® Card from American Express
20% at Amazon.com up to $200 back in the first 6 months, 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
0% intro for the first 15 months (then 13.99% to 23.99% variable)
$0
This everyday cashback card is ideal for Black Friday and holiday shopping with 20% back at Amazon.com up to $200 back in the first 6 months. Rates & fees
Chase Freedom Flex℠
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
0% intro for the first 15 months (then 14.99% to 23.74% variable)
$0
Get up to 5% cashback in rotating and newly added everyday categories. The refreshed Freedom Flex card has lots of earning potential.
Citi® Double Cash Card
Up to 2% cash back on purchases (1% when you buy plus 1% as you pay)
13.99% to 23.99% variable
$0
Earn up to 2% on every purchase with no annual fee. This is the highest flat-rate cashback card on the market.
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

Do I qualify for a cashback credit card?

There are various factors that go into credit card approval. You’ll also need several pieces of information to apply. To start with, however, these are the two most important factors:

  • Your income.
    Your card provider wants to know you have the income pay your card bill. To gauge this potential, it’ll consider your debt-to-income ratio — your monthly debt repayments divided by your monthly income.
  • Your credit score.
    For most cashback credit cards, you have the best chances of approval if you have at least a good FICO score of 670 or above. If you have a FICO score below that or you’re new to credit, consider a secured credit card. If you’re a college student, you may qualify for a student credit card.

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.

How to use a cashback credit card responsibly

Especially if this is your first card, this is a great time to build solid financial habits. Here’s how:

  • Pay off your balance in full every month.
    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.
  • Keep an eye on fees.

    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.

Picture not describedCheck your card’s Pricing and Terms document to see the fees you’ll pay.

  • Keep your balance low.
    As a rule of thumb, try to keep your balance below 30% of your credit limit at all times. This will help you avoid being surprised by your balance at the end of the month.

After a cashback credit card, what’s next?

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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