A cash back credit card is a type of credit card that gives you back a percentage of your purchases in the form of cash. You earn cash back by making everyday purchases with your card, and you can typically redeem it as a credit on your statement, or sometimes as a gift card or direct payout. Below, we cover what a cash back credit card is, how it earns and pays out rewards, how it compares to reward points, and how to choose one that fits your spending.
What is a cash back credit card
A cash back credit card is a credit card that returns a set percentage of what you spend as cash, which you can redeem to reduce your balance or receive as a payout. It rewards routine purchases without the need to track or convert points.
These days, most credit cards offer some kind of perk or reward for your spending. The two most common types are reward points and cash back.
Reward points can be accumulated and exchanged for everything from airline miles to gift cards to account credits. Cash back is more simple: money that's given back to you, calculated as a percentage of your credit card purchases.
How does a cash back credit card work
There are many cash back credit cards out there, each offering different cash back percentages. No matter the percentage they pay, most let you earn in one of two common ways:
Flat-rate spending: You earn the same cash back percentage on all purchase types, whether it's dining, gas, travel, or groceries.
Category spending: You get higher cash back rates on specific types of purchases. For example, you might earn 2% cash back on grocery and gas purchases, and 1% on everything else.
Cards that offer higher cash back rates for certain categories may have spending limits. For example, you might earn 3% back on all gas purchases up until you've spent $2,000, after which the cash back rate drops to 1%.
How to redeem your cash back
When and how you redeem your cash back depends on the card.
How to use the cash back you've earned
Not every cash back credit card pays you out in the same way. The most common ways to redeem your cash back include:
Statement credit: Apply your cash back to your bill to lower your balance.
Gift cards: Some cards let you trade cash back for gift cards to specific retailers.
Annual payout: A few cards send your cash back once a year, sometimes by cheque.
Linked account credit: Some cards credit your cash back to an account you connect, like your chequing or savings.
How often cash back can be redeemed
You can typically cash in your cash back at one of the following intervals — though it depends on your credit card issuer:
Monthly: An automatic payout each month.
Annually: One payout period per year, typically during a set month.
On demand: You choose when you want to redeem (but check to see whether there's a minimum amount that applies).
Cash back vs reward points
Cash back and reward points are the two most common ways credit cards reward your spending, and the right one depends on how you like to use your rewards. The table below compares the two at a glance.
Feature | Cash back | Reward points |
|---|---|---|
| How it works | Returns a percentage of your spending as cash, redeemable toward your balance or as a payout. | Earns points on purchases that you redeem for travel, merchandise, gift cards, or statement credits. |
| Value and predictability | Clear and consistent, since the value is fixed as a dollar amount. | Variable, since a point's value can change depending on how you redeem it. |
| Who it suits | People who want simple, predictable value with little effort. | People who enjoy optimizing rewards and travel frequently. |
If you want simple, predictable value, cash back is often the easier choice. If you enjoy optimizing rewards and travel frequently, points may suit you better.
How to choose a cash back credit card
Like with any other credit card, you'll want to look at the details — eligibility requirements, annual fees, interest rates, extra benefits (like travel insurance), and more.
Beyond those basics, it's the cash back earning potential that can help you decide which cash back credit card is right for you.
Spend a lot of time on the road? A card that offers a higher cash back percentage for gas purchases could help you earn rewards the fastest.
Plan to use your card for everyday spending that spans most categories? Consider a card that offers a reasonable flat earning rate for all categories.
In any scenario, you'll want to consider whether there's a cap on eligible cash back, since that can affect how much you earn overall.
Are cash back credit cards worth it
A cash back credit card is worth it when the rewards you earn outweigh any fees or interest you pay.
If you pay your balance in full each month, the cash back you earn on everyday spending is essentially free money back. A card with an annual fee can still be worth it if a higher earning rate more than covers that fee.
The math changes if you carry a balance. Interest charges are almost always higher than the cash back you earn, so any rewards can be quickly wiped out by interest. In that case, a lower-interest card may serve you better than a cash back one.
