What Are Cash-Back Rewards and How Do They Work?

By Stacey Leasca · June 22, 2023 · 6 minute read

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What Are Cash-Back Rewards and How Do They Work?

Everyone loves a good deal, especially when it comes with a little cash back in their pockets.

According to a Lending Tree survey, 87% of U.S. adults have at least one rewards credit card. Another poll found that the majority 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, including how cash-back rewards work, 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, a few cards offer 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.

How Does Cash Back Work?

Cash-back rewards are easy to use. All that 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 pocket.

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.

Four Ways to Redeem Cash-Back Rewards

Depending on the cash back card, there may be a number of different ways you can redeem cash back rewards. Here are some commonly offered options.

1. Credit card balance reduction: This allows you to have your cash rewards applied to your balance and use them to pay off a portion of your monthly bill.

2. Gift cards: Some card issuers allow you to redeem your cash back rewards in the form of gift cards to your favorite retailers or restaurants. To sweeten this deal, some issuers partner with other companies, such as online retailers or airlines, 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 that users need to do is select the charity and the card does the rest.

4. Paper check or direct deposit: You can often redeem your cash-back as just that — cash. In this case, you ask your card issuer to transfer the money directly to your bank account or send a paper check.

The Different Types of Cash-Back Cards

While cash-back cards all work in a similar way, there are some differences between these cards to keep in mind.

Some are flat-rate cards, which means that cardholders 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 a bonus category cash back card. These cards offer higher cash back percentages on certain purchase categories. For example, you might get more cash back on gas and groceries (say 2% or 3%) than you do on other items (say 1%). If you opt for this type of card, it can be a good idea to make sure the higher variable percentage is for items you purchase often.

Some cards rotate these bonus purchase categories every quarter, and you need to activate your rotating bonus categories in order to earn rewards. Others allow you to choose your bonus category.

Any of these cards may offer additional features, such as:

•   Special promotions One way 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 signup bonuses to attract new customers. This might be a certain lump sum of cash back (say $100) if you spend a certain amount in the first three months. Or, you might be able to earn double or triple cash back for a set period of time.

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 pay out immediately. Like your statement balance, your rewards will accrue each month and show up on your monthly statement.

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1Members earn 2 rewards points for every dollar spent on purchases. No points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points as cash deposited into your SoFi Checking and Savings account, as a statement credit to a SoFi Credit Card account, as fractional shares into your SoFi Invest account, or as a payment toward your SoFi Personal Loan or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.


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