You might have heard the phrase “there’s no such thing as free money.” You may also have heard that “money doesn’t grow on trees,” but we’re pretty sure money is still made of paper. While cash back from your credit card isn’t exactly free money, using credit wisely can be beneficial.
How Does Cash Back Work?
Cash back is the rebate of the credit card world The money that you get back, depending on the card and the deal you’ve gotten, may come in the form of a check, statement credit, or deposit with your financial institution.
With points, you might end up with $10 off your next Starbucks purchase; but you might actually prefer The Coffee Bean and Tea Leaf, so a Starbucks card may hold no value for you. With a cash-back reward, you typically get to decide how you want to spend the money: your mortgage, your lunch, your boyfriend’s birthday present, or even your credit card debt.
While some credit card companies offer a flat cash-back rate, other cards offer some combination of a flat cash back rate, and a specialized cash back rate for certain categories (often ones you can choose).
Card holders may be eligible to receive varying amounts—typically a percentage of spending in a certain category, e.g., dining, hospitality, airlines, or groceries.
But choosing a cash-back card with the best rewards isn’t so simple. There are many different kinds of cash-back rewards which may be available.
• Cash back on a monthly, quarterly, or annual basis.
• The cash back could be for any kind of purchase or for particular purchases in certain categories like dining, gas, groceries, etc. Sometimes it might be a combination of these two with higher rates of return on certain categories.
• Timed spending bonuses: If you spend a certain amount within a certain prescribed time you may be eligible for even more cash back than the base amount.
• Certain cards might also offer non-cash benefits like flight upgrades or extended warranties on purchases made with that card.
Why Do Cash Back Rewards Even Exist?
How is this even possible? Getting paid to spend money sounds like the kind of job you invented when you were twelve—it couldn’t possibly be real.
It turns out that the money you’re getting back comes from some very real places. Of course, credit card companies will try to get you sign up with them instead of their competitors. It’s dog-eat-dog out there. Credit card companies have since come up with a variety of tools to attract customers, and cash back is a common reward.
But where does the money come from? If you’ve ever been asked to fulfill a credit card minimum purchase amount you know where it comes from. The $10 minimum at the cafe is not there entirely to keep you adding extra shots to your morning latte (although you’re totally going to anyway).
With so many kinds of credit cards out there, why would you consider a cash-back card?
• Credit cards with cash-back rewards might actually help you earn more money than a low-interest-rate checking account with a debit card. Some checking account interest rates can often be less than 1% APY. Getting 5%—or more—cash back on your purchases is a lofty difference. Credit card spending, though, is still spending—not saving—an important difference to keep in mind when making purchases. Buying within a budget is still an important consideration.
• Some cash-back cards offer sign-up bonuses or bonuses for spending over a certain amount or in a certain categories. When used responsibly, these types of bonuses could be used for special purchases a buyer might not have been able to afford otherwise. Two tickets to Paris please!
• Consumers with credit scores of 740 and higher are typically the ones who qualify for cards with the highest cash-back rewards, which could be up to 6% when purchasing items from designated categories. Yet another reason to pat yourself on the back for your high credit score.
Okay, so maybe some of the maxims are correct. Nothing in life is free and money doesn’t grow on trees. Like anything good in life, there can be a downside (we’re looking at you, cupcakes).
• Many cash-back programs actually come with a maximum on rewards. While it seems that the more you spend the more you get, eventually you might just be spending more.
• Some cash-back credit cards have annual fees. While this may seem small compared to the money you’ll be getting back, it might be worth it to do the math and make sure the pros outweigh the cons before you are convinced that this card is worth your spending power. Some cards with hefty fees reward the card holders with perks beyond the cash-back bonus.
• Like any other credit card, if the balance due is not paid on time, there are typically interest charges and fees added to the principal balance. That amount may negate any cash-back rewards you earned during that statement cycle.
• Perhaps the biggest con: Choosing and managing a credit card can be complicated. Lots of homework, (i.e., research online, with your bank has to go into this one before you may feel ready to commit to this endeavor. With occasional fees and sometimes hard-to-acquire gains, your research is key to making sure you find one that works for your spending habits. Cash-back credit cards can pay off, but it might take some digging to find the right one.
Unfortunately, at the end of the day, there’s no free lunch. Credit card companies are in the business of making money and they rely on your debt to fund their businesses.
Using credit wisely—and reaping all the rewards—typically means paying the balance due in full each billing cycle. Getting to that point can take some time, though.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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