Explain It Like I’m 5, How Do Cash Back Cards Work?

As the most popular credit card type available today, cashback rewards give you a “discount” on every purchase. This is essentially what a cashback card is, as you receive a percentage of your purchase back to your credit card after every purchase and can rack up reward after reward as you go. 

Cash-back was first introduced in 1986 with the Discover card, which introduced the idea that a bank (or store) would give you money back on every purchase. Given this quick history, this Quora user wonders exactly how cash-back cards work. 

A personal favorite of mine, this credit card format allows you to earn “free” money and put it toward your balance, unlike travel cards, which would enable you to earn points or miles. 

What Is Cashback? 

At the most basic level, a cash-back credit card is a type of card that gives you a reward value percentage on every purchase you make. You can then redeem this reward value for a statement credit, a deposit to a bank account (or check), or in some cases, have these points transferred to websites like Amazon for new purchases. 

It’s important to note that cash-back differs from debit card spending. You don’t receive your cash-back reward until your purchase is processed or, in some cases, until after you have paid off the purchase. 

In one way, this Quora user likens cash-back credit cards to the idea that these cards are essentially ATMs from which you can earn a cash advance. However, this wouldn’t be accurate as there is an entirely different set of fees associated with cash advances, which do not exist for cash-back rewards. 

How Do These Cards Work? 

Right from the jump, the good news is that cash-back credit cards are generally more straightforward than their travel counterparts, where you have to be Albert Einstein to correctly figure out how much you have earned for your next trip. Instead, cashback rewards are available on all eligible purchases, while balance transfers, cash advances, money orders, etc., are not eligible. 

These restrictions aside, there are credit cards that offer just 1% cash back on every purchase. This means that if you spend $100, you will earn $1 back, which may not sound like a lot initially, but depending on how much you spend, the reward value can add up quickly. 

Types of Cashback Cards

Flat-Rate

The most basic and best card for most people is the flat-rate cash-back credit card, which gives you the exact percentage back on every purchase. These cards offer between 1.5% and 2% on all purchases and unlimited earning opportunities with no expiration date on your cash-back rewards. 

Tiered 

In the case of a tiered cash-back credit card, you might have a card that earns a higher percentage in one category, like grocery stores, while other purchases receive a lower, separate percentage back. For example, you might have a card offering 6% cash back on groceries and 3% on gas station fill-ups but only 1% on everything else. 

Rotating Category

A popular card type right now, the rotating category generally offers 5% in cash-back value on quarterly purchases that rotate every three months. One quarter might provide 5% cash back at home improvement stores, while the next offers 5% cash back on gas stations. Every other purchase would be limited to just 1% that isn’t in the current bonus category. 

How to Redeem Cash Back

No matter what cash-back credit card you use, you can redeem these rewards once you hit a certain threshold, generally around $25 or $50, sometimes less. Once you have hit this earning level, you can cash in your rewards allotment in several ways, and the sky is the limit as to how much you can earn. 

Among the most popular redemption options, you can redeem your rewards directly to your balance as a statement credit, which means you pay the bank a little less monthly. Alternatively, you can ask to have your balance deposited into your bank account so that you can spend it any way you want. 

The Bottom Line

At the end of the day, cash-back credit cards are simple, straightforward, and give you an easy-to-use bonus structure that isn’t nearly as challenging to learn or follow as points and miles. Depending on the card type you select, you can maximize your rewards through clever shopping and by using the right card at the right store whenever you swipe with your card. 

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