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How Does Cash Back Work?

A cash-back credit card lets you earn cash rewards every time you swipe. Here’s how to maximize it.

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Every time you use your credit card, your card issuer earns a small profit through the interchange fees it charges the merchant. But shouldn’t you get a cut too?

With a cash-back credit card, you can. 

When you make a qualifying purchase with a cash-back card, your issuer will give you a small cash reward -- typically a set percentage of the purchase amount. In addition to credit cards that offer a flat percentage on everything you buy, there are also cards that offer bonus cash back for purchases in just about every category under the sun -- from dining to travel to groceries and everything in between. 

As long as you use your credit card responsibly and pay off your balance in full every month, it’s hard to go wrong with a cash-back card. But there are strategies to maximize your earning potential and get the most value out of your rewards. Here’s what to know about how cash back works, and how to choose the best cash-back card for you. 

How is cash back earned?

With most cards, you’ll earn cash back every time you make a purchase. The cash back you earn will typically be a fixed percentage of the purchase amount -- typically 1% to 5%, depending on the card and the category of the purchase. 

Depending on your card, your cash back may be called different names -- cash back, rewards points or miles. As long as your rewards can be redeemed for cash or a statement credit directly (some cards, typically co-branded travel cards, don’t have this option), it’s safe to think of your earnings as cash back no matter what it’s called.

Some cards may offer additional cash back or points in certain situations. For example, the Citi Rewards+® Card* will automatically round up your points to the nearest 10, meaning you could potentially earn an extra nine points on each purchase. 

Some cards may cap the amount of cash back you can earn -- whether in total or in a specific category -- per month, quarter or year. Check your card’s terms and conditions to see if yours has any such restrictions.

Note that cash back is typically only earned when you purchase something with your credit card. A cash advance -- where you borrow against your credit line to get cash at an ATM or bank -- generally won’t earn rewards, and you may also be charged hefty cash advance fees or a higher cash advance APR. Depending on your issuer, other cash-like transactions -- such as sending money via a peer-to-peer app like Venmo or gambling-related charges -- may also be considered a cash advance. You also may not earn cash back when you use your credit card to purchase or fund a prepaid debit card, either.

Types of cash-back cards

Cash-back cards typically come in three types in terms of how their rewards are structured.

Tiered or bonus category cash-back cards 

Tiered cash-back cards offer an elevated rewards rate for certain spending categories and a lower rate for all other categories. These cards are the most common type of cash-back cards, and you can likely find a card with bonus rates to suit just about any spending category -- from dining to travel to gas to groceries to online shopping.

The elevated rates typically range anywhere from 2% to 6%, while the rate for all other purchases is typically a standard 1%. Most tiered cards offer multiple bonus categories, though the exact number of bonus categories can vary widely. 

Flat-rate cash-back cards 

Flat-rate cards provide the same rate on all qualifying purchases -- typically a minimum of 2% back or 2 points per dollar. They don’t offer higher earnings rates in any specific spending categories like tiered cash-back cards do. 

There are two main reasons to get a flat-rate cash-back card. If you want simplicity, you can use a flat-rate card as your only credit card and earn a decent return on all your purchases without tracking spending categories. If you want to maximize rewards, you can pair a flat-rate card with a tiered rewards card, and use the flat-rate card on any purchases that don’t fall into the tiered card’s bonus categories. An example of a flat-rate rewards card is the Wells Fargo Active Cash® Card.

Rotating cash-back cards 

Like tiered cash-back cards, these credit cards offer greater rewards for specific purchases. The difference is, the bonus categories change, typically every quarter, so roughly once every three months. Most issuers also have a spend or earnings cap for the elevated rewards categories. After you reach the cap, you’ll earn 1% cash back instead of the elevated rate.

For example, a rotating cash-back card may offer elevated rewards on grocery store purchases from January to March, gas station purchases from April to June, and so on. You may have to activate bonus categories each quarter before you can earn elevated rewards on those purchases. Examples of rotating cash-back cards include the Chase Freedom Flex℠* and the Discover it® Cash Back*.

How can cash back be redeemed and how much is it worth?

Depending on your specific card, issuer or rewards program, you may be able to redeem your accrued cash back or rewards points in several different ways. 

These are the most common redemption options for cash-back cards:

  • Direct deposit: The most direct redemption method is literal cash back -- you can redeem your rewards for a direct deposit into your bank account or a paper check. Most cash-back cards will offer this option, though the exact way you’ll receive the cash may differ by issuer. Most issuers offer cash-back redemptions at a 1 cent/point ratio. 
  • Statement credit: You can also apply the value of your rewards as a statement credit, which will be applied to your current bill and reduce the amount you owe. Like cash back, a statement credit is usually redeemed at a 1 cent/point ratio, but certain issuers like American Express offer less. Others may occasionally offer redemption bonuses that give you a better rate if you redeem your statement credits to offset certain types of purchases (such as Chase’s Pay Yourself Back categories).
  • Gift cards: Some issuers may let you redeem your cash back or rewards as gift cards. If the redemption rate is 1 cent/point, we generally recommend redeeming your points as direct cash back or a statement credit instead, as you’ll get greater flexibility for the same value. But if your issuer offers bonuses on gift card redemptions -- such as a $25 gift card for 2,000 points instead of 2,500 -- it can be worth it to get the gift card as long as you’re sure you’ll use it.
  • Shop with points: Some issuers let you redeem your cash back or points as a shopping credit with certain retailers, such as Amazon, PayPal or even Apple. Though it varies by issuer, the redemption rate is typically less than 1 cent/point -- meaning 100 points will convert to less than $1 off a purchase -- making these options generally a poor value. Even if the redemption value is equal to 1 cent/point, you’ll get more flexibility by redeeming your points for direct cash back and paying for your purchase that way.

If you have multiple cards with the same issuer, you may be able to pool your points between cards and unlock more redemption options via the issuer’s premium, annual-fee charging cards. For example, you can transfer your points from the Chase Freedom Flex to the Chase Sapphire Preferred® Card and redeem your points via Chase’s airline and hotel transfer partners for outsized value

Who should get a cash-back credit card?

Anyone who plans to use a credit card often and responsibly can benefit from a cash-back or rewards card. Not taking advantage of a chance to earn cash back on your everyday spending is like losing out on free money. 

However, the best type of cash-back card for you depends on your lifestyle and wants. If you spend a lot in a certain category each month, look for a card that offers elevated earnings rates for that category. 

And also consider the redemption options: If you’re only interested in redeeming rewards for cash in your bank account, make sure your card offers that option instead of earning points or miles that can’t be redeemed for cash. On the other hand, if you want a greater variety of redemption options, you’ll most likely find them with cards labeled as “rewards cards” or “travel rewards cards” rather than “cash-back cards.”

Who shouldn’t get a cash-back credit card

While cash-back credit cards, and credit cards in general, offer a multitude of benefits, they’re not for everyone. A cash-back credit card may not be the best option -- and may even harm your finances -- if you:

  • Struggle with overspending: If you have credit card debt or know you have a tendency to spend beyond your means, there’s no shame in sticking with cash or debit cards as your primary payment method to avoid the temptation of overspending on a credit card. Although you’ll lose out on rewards, staying out of debt and preserving your financial health is much more important. 
  • Are building credit: If you have poor or fair credit, or are just starting on your credit journey, you likely won’t qualify for the best cash-back credit cards. Instead, focus on building your credit with secured cards or student credit cards. Some cards meant for those with poor or fair credit -- such as the Discover it® Secured Credit Card* or the Petal® 2 “Cash Back, No Fees” Visa® Credit Card -- do offer cash back. But think of the rewards as icing on the cake and keep your eye on your primary goal of building credit through responsible usage.
  • Would benefit more from a 0% APR credit card: Credit card issuers offer cash back as a way to draw in new customers, but that’s not their only strategy. Another common offer is a 0% introductory APR period, where your balance won’t accrue interest for a certain amount of time, typically anywhere from a year to 21 months. Though exceptions exist, the cards with the longest 0% APR periods typically aren’t the ones offering the best cash-back rewards, and vice versa. If you want to pay off existing credit card debt or finance an upcoming purchase, you may want to consider a 0% APR card with fewer rewards if the interest savings will be greater than the cash back you could earn with a different card. 

Best cash-back credit card suggestions 

With so many cash-back cards out there, it can be hard to pick the best one. Here are some of CNET’s top picks:

  • Chase Freedom Flex: A strong, rotating category cash-back card with no annual fee that offers 5% cash back (on the first $1,500 spent, then 1%) for common bonus categories most people will use -- grocery stores and gas stations, anyone? 
  • Wells Fargo Active Cash Card: A great flat cash rewards option with no annual fee. It offers 2% cash rewards on purchases regardless of what they are. 
  • Blue Cash Preferred® Card from American Express: Offering one of the highest rewards rates on U.S. supermarket purchases and select U.S. streaming services, plus a good rate at U.S. gas stations and for transit, this card covers most of your bases for everyday spending. There’s a $95 annual fee ($0 introductory fee for the first year), but its high earning potential can easily offset the fee.
  • Capital One SavorOne Cash Rewards Credit Card*: A no-annual-fee card best suited for foodies and social butterflies. It offers elevated rewards on dining, entertainment and grocery store purchases.
  • Petal® 2 “Cash Back, No Fees” Visa® Credit Card: The Petal 2 card lets you earn cash-back rewards even if you have less-than-perfect credit. Although the rewards are slightly lower than other cash-back cards, this is a great card to start building your credit with if you can’t qualify for other cards.

The bottom line

As long as you can handle credit cards responsibly, you should have some kind of cash-back or rewards card in your wallet. Cash-back cards let you earn a return on your everyday spending at no additional cost to you, so long as you always pay your bills on time and in full. But if you pay late or carry a balance, interest charges and fees will quickly offset any rewards you earn.


Generally, cash-back rewards earned from spending -- whether it’s the percentage-based cash back you earn from every purchase or a one-time welcome bonus you get from meeting a spending threshold -- aren’t taxable. The IRS considers such rewards to be a rebate on your spending.

Cash-back rewards earned from things other than spending -- such as a referral bonus you get for referring a friend to sign up for a credit card -- may be considered taxable income.

Check with your tax preparer if you’re unsure about your specific situation.

The best cash-back card for you depends on many factors -- what you spend your money on, how you want to redeem your rewards, how much effort you want to put into tracking your rewards or spending categories, what other perks and cardholder benefits you find valuable, and more. For a good all-rounder option, the Wells Fargo Active Cash is the way to go.

Check out CNET’s top picks for the best cash-back cards in general, as well as our favorite credit cards for spending on restaurants, groceries, gas, travel, online shopping and streaming services.

While often used interchangeably, cash back and points are technically different. In the strictest sense, cash back refers to cash-like redemption options only -- direct deposit, checks and statement credits. Credit cards that earn points typically offer multiple redemption options. These can (and typically do) include direct cash back and statement credits but also things like gift cards or travel redemptions.

Points typically offer more flexibility than cash back, but these generalizations don’t matter as much as the redemption options offered by your specific card. Before you sign up for a card, check the cardholder agreement to see if it offers the exact redemption options you’re looking for, whether it calls itself a “cash-back card,” a “rewards card” or something else.

*All information about the Citi Rewards+ Card, Discover it Cash Back, Discover it Secured Credit Card, and Capital One SavorOne Cash Rewards, and the Chase Freedom Flex has been collected independently by CNET and has not been reviewed by the issuer.

The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.

Raina He is a contributor to CNET Money. She previously worked as an editor at CNET, focusing on credit cards, banking and loans. She graduated from the University of North Carolina at Chapel Hill with a B.A. in Media and Journalism. Before coming to CNET Money, she was an editor at NextAdvisor, a personal finance news site that shared a parent company with CNET Money.
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