how do cash back credit cards work

How Do Cash Back Credit Cards Work?

How to Make the Most of Your Cash Back Card

Cash back credit cards are a savvy consumer’s best friend. With inflation and cost of living soaring after the pandemic, people are finding new and creative ways to save extra money to make ends meet. Using a cash back credit card can be a great way to get some money back in your pocket for your everyday spending. But you might be wondering: Is this too good to be true?

In this article, we’ll be going over what cash back credit cards are, how they work and their pros and cons. Keep reading to find out how you can start earning money back by using this simple tool.

What Is a Cash Back Credit Card?

A cash back credit card is a type of credit card that rewards cardholders by giving them anywhere between 1-5% of their spending back in the form of cash or statement credits. A statement credit is money credited back to your credit card, which reduces your balance. For example, if you’ve spent $100 on the credit card and received a statement credit of $10, instead of paying the full $100, you’ll only have to pay off the remainder of $90. This type of card offers an incentive to cardholders to use it for everyday expenses and maximizes consumers’ spending power.

How Does a Cash Back Credit Card Work?

Every cash back credit card is different, and it’s important to check the card’s annual fee and interest rate before applying for it. An annual fee is a fee you’ll have to pay each year to use the credit card. For those who don’t want to pay an annual fee, there are plenty of no-fee options, and some credit cards offer to waive the annual fee for the first year. As for interest rates, be sure to check and compare them against other credit cards if you plan to carry a balance on it. If the card has a higher-than-average interest rate, it could potentially offset your cash back rewards.

Once you have the cash back credit card on hand, start using it for your everyday spending to collect your cash back rewards. Cash back accumulates when you make eligible purchases, and the percentage typically depends on the card and the spending categories. For example, a card could offer 2% on groceries and gas but 1% on all other purchases. Some credit cards also offer sign-up bonuses or introductory periods with higher cash back rates to attract new customers.

After collecting your cash back rewards, you can choose to redeem them or continue accumulating them. If you choose to redeem them, the most common redemption options are: receiving a statement credit, having the cash deposited into a linked bank account or getting a check in the mail.

Pros of Using a Cash Back Credit Card

Credit cards, in general, can be a great financial tool when you maximize all of their benefits. Below, we’ve outlined the pros of using a cash back credit card:

  • They offer a straightforward, easy-to-use earning scheme of a certain percentage of every dollar you spend.
  • Most of them don’t have an annual fee.
  • Many of them offer sign-up bonuses and incentives.
  • Some cards offer shopping perks, such as extended warranties and refund guarantees.
  • Some cards offer a 0% APR interest rate for a limited time on purchases and balance transfers.

Cons of Using a Cash Back Credit Card

Although a cash back credit card may sound pretty great, some cons should be considered:

  • Many of them have relatively high interest rates.
  • They charge foreign transaction fees if you plan to use it abroad.
  • Some cards may have an earnings cap on your rewards.
  • Most of them don’t offer any travel rewards.

Final Thoughts

Overall, a cash back credit card is a simple and practical way of stretching your hard-earned cash. They tend to offer many extra benefits on top of the cash back feature, such as sign-up bonuses and shopping perks. It’s important to choose a cash back credit card that aligns with your spending habits so you can maximize your cash back benefits. Despite all the advantages, remember to manage your credit responsibly. Paying off your balance in full each month can help avoid interest charges and going into debt. If you don’t have the means to stay on top of the payment every month, consider using a debit card or cash instead to limit your spending.