Everyone loves a good deal especially when it comes with a little cash back in their pockets.
According to a CreditCards.com survey, 57% of U.S. adults have at least one rewards credit card. And, of those, 43% of rewards cardholders prefer cash-back cards over any other option.
If you’re thinking about adding a credit card to your wallet, here are a few things you might want to know about cash-back rewards, like how do cash-back rewards work anyway, and whether this type of rewards card makes sense for you.
What Are “Cash-Back Rewards”?
Cash-back credit cards are offered by many credit card companies to qualified consumers. Consumers can use these credit cards to make purchases, and a certain percentage of that purchase is returned to the customer as a cash incentive. In other words, cash back rewards can be an easy way to make the most of everyday expenses.
Typically, cash-back rewards range between 1% and 2%, however, there could be cards out there offering more.
Some rewards cards offer a set number of points per purchase that can be redeemed later for cash or for goods like airline tickets, discounts at coffee shops, or gift cards.
Ready for a Better Banking Experience?
Open a SoFi Checking and Savings Account and start earning 4.20% APY on your cash!
How Does Cash Back Work?
Cash-back rewards can be extremely easy to use. All consumers have to do is spend as they normally do, and in return, the credit card company calculates the percentage to return to the cardholder based on what they spent on eligible purchases.
For example: A card pays a flat rate of 2% cash back on all purchases. If the cardholder spends $1,000 in a statement period, the card issuer will then give the cardholder $20 in cash-back rewards.
The card issuer pays out the percentage at the end of a given term, which could mean paying it out at the end of a statement period or billing cycle, or even once you hit a predetermined amount, like $20.
Cash-back cards might come in handy for everything from large purchases to everyday needs. Think of it this way—rather than purchasing things with cash, which doesn’t provide any added benefits, a cash-back card could return money right into a consumer’s pockets.
However, in order for that money to really pay off, the cardholder will likely want to pay off the credit card balance every month in full so they’re not accruing interest and fees, and negating that cash-back reward.
One thing to remember is that cash-back cards are different from other rewards cards. There are rewards cards that offer specific travel rewards, cards that partner with gas stations to earn free gallons, and many more.
Recommended: Credit Cards vs. Debit Cards
Four Ways to Redeem Cash-Back Rewards
As explained above, cash-back rewards cards offer cardholders a percentage of money spent on purchases during a given billing cycle. However, there may be a variety of ways consumers can receive those cash rewards.
1. Credit card balance reduction: Card users may be able to allocate their cash rewards to be sent directly back to the card issuer each billing cycle. This is known as “credit card balance reduction.” It means users would be paying off a portion of their bill with their own rewards.
2. Gift cards: Some cardholders may be able to redeem their cash-back rewards in the form of gift cards to their favorite places. To sweeten this deal, some credit card companies partner with destinations like coffee shops, online retailers, airlines, and more, to provide bonus payouts when cash-back rewards are redeemed with a gift card.
3. Charitable giving: Several card providers allow users to use their cash back for good, sending their rewards directly to the charity of their choice. All users need to do is select the charity and the card does the rest.
4. Paper check or direct deposit: One other option is to ask the card company if it’s possible to send the rewards money right to your bank account in the form of a direct deposit or to send a paper check directly to you via mail.
The Different Types of Cash-Back Cards
Though cash-back rewards seem straightforward enough, there are a few nuances consumers might want to know to help use each card to its highest potential.
There is the flat-rate card, which offers a standard rate when it comes to cash-back rewards. That means cardholders will receive the same exact cash-back percentage on every eligible purchase, be it groceries or plane tickets. This option is easy as users never have to think about the way they use their cards.
Another option is varying cash-back bonuses, which offer different amounts of cash-back rewards for different purchase categories.
For example, if a person opens a gasoline-specific credit card, they may get more cash back on purchases at the pump—say 2%—than they do on other items—say 1% on all other purchases. If opting for this type of card, it might be a good idea to make sure the higher variable percentage is for an item purchased often.
Lastly, there is a bonus category. Cash-back rewards may not end at the baseline cash-back percentage. Often, credit card companies will offer bonuses and opportunities for cardholders to earn even more in specific categories.
Any of these cards may offer special features, such as:
• Special promotions: One option to earn even more cash back may be via a special promotion run through the credit card. For example, a credit card may typically offer 1% cash-back, however, for one billing cycle, it could partner with a large retailer for 5% cash-back for all eligible purchases.
• Signup bonuses: Cash-back rewards cards might also come with higher incentivized signup bonuses to get new users to join. This might be in the form of cash signup bonuses of $100 or more if a user spends enough money in the first three months of card use. All this could add up to more cash-back in your pocket now to have more to spend—or save—later.
Potential Drawbacks of Cash-Back Rewards
Cash-back credit cards can come with a few potential downsides that users may also want to be aware of. As with signing up for any new credit card, it’s a wise idea to read the fine print.
For instance, you may want to be sure to read through the contract carefully to understand exactly how the rewards work, what to expect along the way, and also suss out any hidden credit card fees such as late payment fees, balance transfer fees, foreign transaction fees, and more.
It can also be a good idea to find out if the card has a high annual fee, which may negate any earned rewards, and what the APR (annual percentage rate) is, in case you get into a bind and need to carry over a balance month to month. However, it’s key to keep in mind that carrying a balance nearly always outweighs any rewards.
It’s also important to note that many credit cards (cash-back or otherwise) can retain the right to change their bonus structure at any time. That means it could change the percentage of cash users receive in return for purchases for a lower (or higher) amount. So, users might want to be happy with the card and its rates and policies, not just the cash-back rewards, as that could change at any moment.
When looking at the fine print, consumers might also want to identify if the card comes with a cap on possible rewards. Many cards limit just how much money a user is allowed to claim, so make sure to know that number and be comfortable with the limit.
And, again, like all cards, it’s key to pay off a cash-back rewards card in a timely fashion. This way, users won’t be paying interest on purchases with a card that was meant to bring them a little money in return.
Recommended: What is a Good APR?
The Takeaway
Cash-back is a credit card rewards benefit that refunds the cardholder a small percentage of some or all purchases made with the card.
Every time you make an eligible purchase with your cash-back credit card, your card issuer will pay you back a percentage of that transaction.
Your cash-back reward won’t necessarily payout immediately. Like your statement balance, your rewards will accrue each month and show up on your monthly statement.
Many cards offer a number of ways to redeem the cash-back rewards that accumulate on your card statement, including credit towards your balance, a gift card, a check, a charitable donation, or cash off when checking out online at certain retailers.
Choosing a credit card with the right cash-back rewards for you can take a little research.
One option you may want to consider is SoFi Checking and Savings®️.
SoFi Checking and Savings is a simple-to-use online banking account that comes with the ability to earn cash-back rewards when you spend at a rotating list of your favorite brands and merchants.
Plus SoFi Checking and Savings has no account fees, overdraft fees, or minimum balance fees, and offers access to 55,000+ fee-free ATMs.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi Money® is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member
FINRA / SIPC . SoFi Securities LLC is an affiliate of SoFi Bank, N.A. SoFi Money Debit Card issued by The Bancorp Bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
SoFi members with direct deposit can earn up to 4.20% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 4/25/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOMN20017
