When credit card holders use their cards to make purchases, they can earn cash back rewards as a bonus. These rewards can be in the form of either dollars or points, which can be redeemed on an online marketplace owned by the credit card company.
Cash back rewards are typically calculated as a percentage of the purchase amount. For instance, if you have a credit card with a 1.5% cash back rate and you make $100 in purchases, you would earn $1.50 in cash back. Although these rewards may appear insignificant, they can accumulate rapidly over time.
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How do cash back credit cards work?
Credit card cash back rewards are earned when you use your card to make purchases in certain categories, like grocery stores or gas stations.
The types of spending that are eligible for rewards and the form that the rewards take can vary, including rotating categories and the value of the points earned.
It’s important to note that some cash back credit cards have a maximum limit on the amount of cash back you can earn within a certain timeframe.
How cash back credit cards reward your spending
- By a flat amount
- When you have a credit card that offers cash back rewards, you will receive a certain percentage of rewards for every purchase you make. These rewards are the same for all types of purchases, making it simple to earn rewards. However, the percentage of rewards you earn with a flat-rate rewards card may be lower compared to a card that category-specific card.
- In fixed categories
- Credit card cash back rewards can be earned through fixed-category rewards cards. These cards allow cardholders to earn cash back on spending in specific categories such as travel, groceries, or entertainment. While the reward amounts for these cards can be higher compared to flat-rate rewards cards, it is ultimately the card issuer’s responsibility to determine the categories and select the participating merchants.
- Within rotating categories
- Certain credit cards that are specific to certain categories provide additional and generous rewards for a limited period of time, usually on a monthly or quarterly basis. These rotating categories can include various spending options such as electronics or purchases from a specific retailer.
How cash back credit card rewards are paid out to you
Credit card cash back rewards can be received in the form of either actual money or points.
- Dollars
- Depending on the policies of your credit card issuer, you may receive your cash back rewards in different forms such as a check, a prepaid debit card, or as a credit on your monthly statement.
- Points
- The value of points may be higher than cash if you redeem them through the reward portal provided by the credit card issuer. This depends on the relationships between the card issuer and merchants.
How to earn cash back on your credit cards
One way to earn cash back rewards on your credit cards is by obtaining a cash back card. By using this type of card and making purchases, you can accumulate rewards. Finally, you can redeem these rewards through the company that issued your card.
Shop around for the card that suits your spending
When it comes to credit cards with cash back rewards, there is a wide variety of options available. It’s worth exploring different cards to find the one that aligns with your lifestyle. Before applying, it’s important to know your credit score so you can have an idea of your likelihood of getting approved.
Time your spending
Timing your spending strategically can be advantageous, especially when it comes to making purchases like a new computer. By aligning your spending with a credit card that is about to rotate its cash back rewards into an electronics category, you can maximize your benefits.
Keep an eye out for notifications, either via email or within your account settings, that will inform you about the eligible or rotating categories for cash back rewards. These notifications will also provide important details such as deadlines and eligibility periods.
Evaluate the value of the rewards
Redeeming cash back rewards is a straightforward process, whereas points can hold greater value. Some credit card issuers may provide a bonus when you redeem your points through their online marketplaces.
What to know before signing up for a cash back credit card?
Using a credit card that offers cash back rewards is an excellent strategy to maximize your card spending. By paying off your balance completely each month, you can avoid paying interest and other fees while accumulating a substantial amount of cash back rewards annually.
If you have an outstanding balance on your credit cards, it is probable that you will end up paying more in interest every month compared to the rewards you earn. Credit cards with cash back rewards are most suitable for individuals who consistently pay off their entire balances each month.
Before you apply for a credit card with cash back rewards, it’s important to analyze your own spending patterns. Take a moment to reflect on how you typically spend your money. Are you someone who frequently eats out at restaurants?
Do you often stay at hotels? Understanding your spending habits will help you choose a cash back rewards card that aligns with your lifestyle and allows you to earn the most rewards possible.
It’s also a good idea to compare various cards to find the one that suits you best. Each card has its own unique rewards program, so it’s worth doing some research to find a card that offers rewards in categories that match your spending habits.
The Bottom Line
Numerous credit card companies provide a special bonus for new cardmembers in the form of cash back rewards. Depending on the type of credit card that offers cash back, this bonus can be received as a credit on your statement or a prepaid debit card.
In the case of rewards cards based on points, you will usually receive points instead. It’s important to keep in mind that these bonus offers usually come with a requirement to spend a specific amount within a few months of opening the card.