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How do cash back credit cards work?

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Cash back credit cards work by paying you back a percentage of your eligible purchase price at the end of your billing cycle. The rebate money back is a cash reward for your purchase. Using a cash back credit card is a useful way to earn back extra cash in return for dealing with credit card payments. There are different reward categories to look at when deciding on a cash back credit card, but we first need to understand how cash back credit cards work.

How does credit card cash back work?

Can you really get cash back on a credit card? Yes, you can, and here’s how. Using a cash back credit card is simple. Every purchase you make with your card, you earn back a percentage of cash rebate. The purchase percentage depends on what type of cash back credit card you have, but most rewards programs offer a 1 percent to 2 percent rate.  

Credit card issuers can do this because merchants have to pay an interchange fee on every transaction. This interchange fee pays for the cash reward on cash back credit cards. Merchants are business owners who accept your payment and have to pay to process your credit card. 

For example, if you were to purchase a plane ticket for $350 and you used a cash back credit card with a 1.5 percent flat rate, you would earn back about $5 just for using the card.

Consumers with good credit put an average of two-thirds of their purchases on their credit cards.

How do I redeem cash back?

The way you redeem your earned cash back depends on your card issuer and preference. You can choose to have the cash directly deposited into your checking or savings account, or get mailed a paper check to cash in. If you are more hands-on with your money, you can put the cash into cash envelopes to keep for later use. Some cards allow you to redeem your cash back as gift cards to stores and brands like Amazon. 

The most popular way to redeem cash back is using it as a statement credit. A statement credit puts the cash rewards toward paying off your total credit card bill.

Benefits of cash back credit cards

There are plenty of benefits to using a cash back credit card. The biggest benefit is that you earn money on almost every purchase you make using the card without extra hassle.

Work on most purchases

If you handle your finances well, using a cash back credit card on most of your larger purchases can be a great way to earn extra cash when spending. Typically, these cards work with purchases such as travel expenses, gas and expensive items.

Require a low amount of effort

Another perk of using a cash back credit card is that it requires little effort, other than making sure you pay your credit balance on time. Using a cash back credit card can also work as a savings account tool as you earn cash on your purchases. Any cash earned on a purchase made using the credit card comes back tax-free as well.

Are simple to use

This type of credit card is easy to use and understand. It’s unlike other credit cards that use miles or points systems for their rewards, which can easily become confusing for the user.

When to consider adding a new cash back card

Although a cash back credit card can be useful, you need to consider a few things before deciding to add a new credit card. First, you need to have good credit. If you start using a cash back card with good credit, you’ll see much better rewards than you’d see with poor credit. 

You should only consider adding a credit card if you see yourself being able to pay your monthly credit balance. If you have reckless spending habits and struggle to stay on top of your payments, this might not be the right time to get a new credit card. Otherwise, this is a great opportunity to earn rewards while not worrying about an increasing interest rate. 

It also might be time to consider a new cash back credit card if you find your current card doesn’t offer a rewards program that works for your financial needs. If so, it’s important to know how to cancel a credit card correctly because it could negatively affect your credit score.

Types of cash back credit cards

There are several types of cash back credit cards available, and it’s important to understand how each of them works. Remember to keep in mind your current spending habits and financial status when navigating different card options.  Here are the most common types you will find:

  • Flat-Rate Credit Cards: Flat-rate cards have the same percentage of cash applied to every purchase you make. With these cards, the amount of money something costs and where you bought it don’t matter. This is the simplest card because you don’t need to enroll in other bonus categories or be involved in a tiered rewards system.
  • Category Bonus Credit Cards: Category bonus cards have rotating spending categories every quarter that give you a higher percentage of cash back on purchases in those categories. These cards are great for those who know that they’ll be able to spend the set amount every quarter to earn the rewards. This type of card works for those who have flexible spending habits and are smart with their finances.
  • Tiered Rewards Credit Cards: Tiered rewards cards are similar to category bonus cards in that they offer high cash back in specific spending categories. This type of cash back card is more consistent than category bonus cards, but you still need to be able to spend the set amount to maximize the earnings. This card is not recommended for those who tend to use their credit card on more regular purchases rather than vacations and expensive purchases because tiered reward cards tend to provide lower percentage rates for those types of purchases.
79% of new credit card users pick their card based on the type and quality of the issuer's rewards.

How does this all affect my credit score?

Using a cash back credit card can affect your credit score, depending on how you use it, just like any other type of credit card. If you tend to forget to pay your credit balance or aren’t on top of your finances, you’ll see a direct negative impact on your credit score. However, if you’re organized with your finances and pay your credit balance regularly, you’ll see your credit score increase over time, which helps you in the long run. 

When using a cash back credit card, it’s crucial to check your credit score regularly to make sure you’re in good credit standing. The better credit score you have, the better your rewards will be when using the card.

It’s important to understand how credit card cash back works with your standing credit balance. If you’re interested in getting a cash back credit card, make sure your credit is in good standing, or learn how to fix your credit score before getting a new card.

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