How Do Cashback Rewards Cards Work?

Estimated read time: 4 minutes

Hey shopper! Have you ever considered changing your credit card to one with a cashback rewards program? If you haven’t, you could be missing out. For some, the idea of using a cashback rewards card could seem intimidating. After all, there are many options to choose from and when you try to dig in, it isn’t always immediately clear what programs are better than others. Not to worry. After reading this beginner’s guide, you will have a stronger sense of how to get started with cashback rewards. A cashback rewards card isn’t technically simple, but we are going to try and explain it with some simplicity, so here goes:

You spend money, you earn cashback rewards. These rewards are usually accumulated by your card issuer as a small percentage of what you spend paid back to you. Often it is 1-2% of every dollar that you spend. This means that if you make an initial $2,000 investment on the card, you will accumulate 1%-2% in cash back, which is equal to $20-$40 in your pocket.

Some card providers simplify this by offering a 1:1 to 2:1 point ratio, rather than using a percentage. For example, a card offering 1 point for every dollar spent would look something like this: your first purchase of $2000 equals 2000 points. When cashed in each point amounts to $0.01. What’s 2000 pennies? Now you have $20. Sound familiar? If you look back at our previous example, that’s 1% of your $2,000 spend. Essentially, whether your card issuer is working in points or in percentages, they are offering you 1% – 2% as the industry wide gold standard for cashback rewards on all purchases, in most cases.

That being said, some cards issuers offer the chance to get the most points with rotating or special categories that provide opportunities for exponential cashback returns. Typical cashback rewards on rotating categories are 5% back on specific purchases that rotate by category each quarter. What kinds of categories do card issuers put on rotation, you ask? Great question!

There are 7 typical categories:

  • Airfare
  • Travel
  • Gas
  • Grocery
  • Dining
  • Entertainment; and
  • Store purchases

Most card issuers carefully align these categories with times of year that match up with consumer spending patterns. For instance, store rewards may be more likely to accumulate at 5% around the holidays. The Discover it Cash Back is one card known for offering this exponential boon on it’s rotating categories. If you’re a planner and a tracker, it may be a good card for you.

Regardless of the methodology for accruing cashback rewards, however, they typically can be redeemed for a gift card, deposited into a bank account (sometimes with special perks if the card issuer is also your checking provider), or used to slice down your existing credit debt. The amount of rewards you will have access to is dependent on how much you use your cashback rewards card, where you use it, and what the point structure is like. Examining your own spending habits in these areas before you set out on your research, will determine which card is the best fit for you.

That’s because each cashback rewards card is different. Some are connected to specific retailers like grocery stores and airlines, while others are intended for more general use. You should figure out where you spend the most money and what kind of benefits would be most beneficial to you before settling on any credit card. If you travel a lot, for instance, a cashback rewards card with travel perks like HSBC Cash Rewards Mastercard, is going to be your best bet.

Clearly, cashback rewards cards have a variety of benefits, the biggest of which is getting paid each time you swipe. Other perks might include things like travel benefits, signup bonuses and intro APR periods. Because these cards are so valuable, keep in mind that you may need a good credit score to access them. That said, we have information on rewards cards for bad credit and no credit too! Consumers may also have to meet certain spending stipulations to receive a specific perk or bonus. Importantly, you should always make sure that you will not receive fewer cashback rewards than you might spend on annual fees and/or interest! This may require a little math on your part.

Going back to our original example of a $2,000 purchase, let’s say your only credit card option comes with an astronomical 25% interest rate and no intro APR offer or other signup bonuses to offset the interest. That’s an additional $500 that you will pay carrying that balance for a year. In the example above, you are only getting up to $40 cashback in most average cases. Let’s pretend this isn’t an average case and your $2,000 purchase was made on airfare during a quarter when that special category reaped a full 5% in cashback rewards.

Even so, you are still only securing $100 in cashback rewards and paying $500 to carry a balance on that card for a year. That’s not a great deal unless you can pay the card in full each month, before the interest kicks in. If you need to make a large purchase and plan to carry a balance, be very thoughtful about what offer you will accept. Look for cards where the rewards for your purchase will offset the fees accordingly.

Long story short, if you take the time to consider your spending habits and make sure that you are committed to paying off the balance each month, a cashback rewards card is almost certainly a great fit for you! Do your research. Luckily, CardGuru makes it easy by offering insight on cashback rewards right on our site to help you figure out what card is going to best enhance your lifestyle.