What Is Cash Back Credit Card and How Does It Work?

Fairy Tale Mortgage

Mar 3, 2022

5

min read

C

ashback cards provide a great way to save money. Wouldn't it be great to get a cash reward for every purchase you make?

While cashback rewards are tempting, it is imperative to understand them before applying for them.

The best cashback credit card for you is one that you'll be able to use often, and that pays you for the kind of purchases you make the most.

Every cashback credit card works uniquely. So, just because others benefit from the scheme doesn't mean you would benefit from it the same.

Thus, you must first understand the cashback credit cards to analyze if this scheme is the best fit for you or not.

Here is everything you need to know about cashback credit cards before applying for the cards.

What Is A Cash Back Credit Card?

Cashback credit cards are the credit cards that provide refunds for a small percentage of the amount spent on purchases to the cardholder's account.

The cashback rewards could be in any form, either dollars or points. The customers can receive money in return or earn points to redeem later.

The awards and bonuses are operated on a percentage basis. For example, If you get 3 % cashback on any purchase, you earn $ 3 on every $100 purchase.

Similarly, for the points, you may receive points on every purchase, and when you collect enough points, you can redeem them for the vouchers and gift hampers.

How Does Cash Back Work?

When you purchase any goods and services online and pay for them using the cashback credit card, you get a certain cashback percentage.

Cashback is like a deal between credit card companies and online retailers. The retailer needs to pay a certain percentage back to the credit card company which the credit card company shares a portion to you.

The cashback differs according to the credit card. Also, cashback could be money back or in the form of points.

Suppose you purchased an item costing $100 and have a 2 % cashback feature on your credit card. So, you get $ 2 cashback. It's not like your item cost $ 98. It will deduct $ 100 from your account then refund $ 2 as the cashback.

What Credit Score Do You Need for a Cash Back Credit Card?

It differs according to the credit cards. Many cashback credits require a good credit score, whereas some may even require an excellent credit score.

However, just because you have a poor credit score doesn't mean you cannot use a cashback credit card.

There are options such as secured cards, which also provide a cashback feature, but the interest rate might be high.

Types Of Cash Back Credit Cards

Flat-Rate Cash Back Cards

Flat-rate cash back credit cards provide the same cashback percentage on all qualifying purchases.

Whether you're purchasing groceries at Costco or online shopping at Amazon.com, you'll get the same amount of cashback for each dollar spent.

For example, Flat-rate cash back cards often provide a flat 1.5 percent cash back on all transactions. For every $100 spent, you'll get $1.5 back in cash.

Bonus Category Cash Back Cards

Bonus category credit cards provide more significant cashback percentages on specific categories of purchases.

On purchases in particular categories, such as travel or grocery, cashback is generally between 2% and 3%. All other purchases will typically earn you 1% cashback.

For instance, a bonus category cash back card may provide:

3% cashback in US supermarkets.
2% cashback at US petrol stations.
1% cashback on all other transactions.

Rotating Category Cash Back Cards

Cashback cards with rotating categories are a little trickier. They are like bonus category cash back cards that give higher cashback rates on specific purchases.

These cards usually come with 5% cashback categories that rotate every quarter. The rotating categories may change from year to year.

However, these cards require you to activate the 5% bonus cash back each quarter. You'll usually get the lesser cashback percentage on any other transactions if you don't.

For example, the rotating category cash back credit card may give 5% cashback on travel expenditures, 3% cashback on pharmacy, and 1% cashback on all other purchases.

The card gives 1% cashback on all other transactions, apart from its rotating bonus categories.

Factors To Consider Before Applying For A Cash Back Credit Card

There are several factors to consider before using cash back credit cards. Here are the factors to consider before applying for it:

Redemption Options

Each cashback credit card reward program operates uniquely. So, it would be best if you looked into the credit card's rewards program before applying for the card.

Some credit cards may require you to earn a particular threshold before redeeming it, whereas some might not have any threshold.

For instance, if you are not a big spender and have 1.5 % cashback and a $250 threshold amount. Then, it will take time to meet the threshold and redeem the money.

Thus, make sure you're aware of your redemption options. Some cards may require you to redeem your rewards in a specified way.

Annual Fees

Some cashback credit cards require an annual charge. These cards usually offer higher cashback rewards.

You'll need to run the cost-benefit analysis to see if the extra benefits you get outweigh the annual charge. Some cards have no yearly cost for the first year but charge beyond that.

If you use your credit card less, cash rewards may not be enough to cover the annual fees.

Reward Structure

You need to choose the best credit card based on your spending habits. A flat-rate card is a great way to get started with cashback credit cards.

Once you've become used to cashback credit cards, you'll want to analyze your everyday spending habits. Then, choose a credit card that gives the most overall cashback for all your transactions.

For instance, people who spend a lot of money on eating and entertainment but not much on other things may get more cashback with the category's credit card.

Interest Rates

Taking your credit card's interest rate while applying for a cashback credit card is essential. It's upon you whether or not you intend to carry the high-interest debt.

The average credit card interest rate is currently over 16%, which may rapidly add up if you cannot make the minimum payment.

If you're searching for a low-interest rate on purchases for a short time, you should also consider the interest rate after the initial APR period ends.

Additional Benefits

Other advantages of a cashback credit card include welcome offers, travel insurance, and purchase protections like extended warranties or trip cancellation coverage, depending on your requirements.

When and When Not To Apply For Cash Back Credit Cards?

Factors

When to?

When not to?

Spending habit

If you use credit cards often to pay for your purchases.

If you do not use credit cards much and do not spend much on the purchases.

Interest rates

If you are willing to take the high interest credit card debt.

If you are not willing to take the high interest credit card debt.

Annual charge

If the reward benefits is greater than the annual charge.

If the reward benefits are lesser than the annual charge.

Threshold

If there is a minimum threshold which you think you can meet.

If there is a minimum threshold which you think you cannot meet.

Credit score

If you have a good credit score, you will get a low APR.

If you have a low credit score, you will get a high APR.

Conclusion

Cashback credit cards are a great way to save extra cash for your wallet. These cards offer cardholders a portion of their purchases as cashback.

There are several cashback cards with unique features. Some cashback cards give a flat cashback percentage, while others offer higher cashback benefits for certain transactions.

Cashback rewards can be redeemed for statement credits, converted into online shopping credits, or deposited directly into bank accounts.

However, there are several factors to consider before choosing cashback credit cards, such that your benefits outweigh the potential charges.