How Do Cash Back Credit Cards Work?

The holiday seasons will soon be here. Meaning it’s that time when your budget will probably increase to accommodate more shopping. Again, that means you’ll need extra cash. This is when a cash back credit card comes in handy. It’s a reward-type card that allows you to earn cash on every purchase transaction you initiate using the card.

If you travel a lot and have a travel reward card, you may already know a little bit about how they work. It’s understandable if you still find them a little difficult and less straightforward to understand. For more information, this detailed guide delves into the nitty-gritty of how cash back credit cards work.

Cash Back Credit Cards Defined

How a cash back card works depends on the earning system furnished into the card. These include:

1. Tiered Rewards


Some cash back credit cards have a flexible or robust earning system as they have different earning categories. For example, the Scotiabank cash back credit card offers a cardholder a cashback earning between one to 4 percent. If you’re familiar with a cash back credit card, you’d probably agree that this rate is one of the most generous in the market. The percentage you’ll earn using Scotiabank, for example, depends on the category of purchase. If you buy a grocery, your cashback earning can hit as high as percent, while gas purchase and other transit expenses offer around 2 percent cashback.

2. Flat Rate Earnings


These types of cash back are the easiest to understand. Flat rate earning means for every purchase you make, you’ll earn the same percentage every time. These cards’ interest rates aren’t usually very high. The percentage earning rate can range between 1-2 percent. So, for example, if your card has a 1 percent cash back rate, what that means is that you’ll earn $10 for every $1,000 transaction. Flat rate earning cards are good for people that make frequent purchases, which can be online or in physical stores

3. Rotating Reward


Cash back credit cards with rotating rewards are also tiered rewards cards. Usually, their earning categories change every quarter. These cards are often appealing as the cash return rate can be as high as 5 percent, although you may be limited to earning rewards when you spend up to a certain amount in a quarter. People that use rotating rewards cards usually have flat-rate reward cards which allow them to earn from everyday purchases since rotating rewards cards may be a little limiting.


You might want to check if a cash back credit card has an annual fee commitment. They usually range between $50 to $100. Some cards attract users with a high cash back rate but have other fees that’ll offset the rewards they give you. You can always calculate if it’s worth it by comparing the rewards you may likely earn (based on your average purchase) with the annual fee. If the former is significantly higher, it might not be a bad deal.

Annual Percentage Rate (APR)

APR is the annual interest rate on your card. So, here’s the thing. If you pay your balance on time and in full, you’ll circumvent charges. If you adopt the habit of not paying in full at the end of the month, your interest rate can stack up, canceling any cash rewards you may be entitled to.

How to Redeem Cash Back

To redeem your cash back rewards is easy and can be via check, a statement credit, gift cards, or direct deposit in your bank account. There are other options such as using your rewards to make donations to charity, book travel, or purchase goods online.

For most cards, you can withdraw anytime you want. These cash back cards usually have a minimum balance policy that limits your frequency of redeeming to when your cash rewards increase to a certain amount. For example, with an American express cash back card, you can’t redeem your rewards until you have at least, a minimum balance of $25.