Cash back is a reward you get back as money when you use a credit card to make purchases
When you swipe a credit card at a store or online, the card issuer — the bank or company that issued your card — pays the merchant a fee, usually between 1% and 3% of the sale. Cash back is the issuer's way of sharing a portion of that fee with you. Instead of keeping all the money, they return some of it to your account.
The amount you get back is a percentage of what you spent. A card offering 1% cash back returns $1 for every $100 you charge. A card offering 2% returns $2 per $100. Some cards offer higher rates — 3%, 5%, or even more — but usually only on specific categories like groceries, gas, or restaurants. Everything else on those cards might earn 1%.
The cash back sits in your account and you decide what to do with it. You can use it to pay down your balance, request it as a check, transfer it to a bank account, or let it accumulate. Some cards let you use it as a statement credit that reduces what you owe.
Key Takeaways
- Cash back is a percentage of your purchase amount returned to you by the card issuer, ranging from 1% to 5% or higher depending on the card and category.
- You only earn cash back on purchases you actually make — the card issuer does not give you money for having the card or for paying your bill on time.
- Most cards with higher cash back rates limit those rates to specific categories like groceries or gas, with a lower rate on everything else.
- Cash back has no tax consequence when you earn it, but you must pay interest on any balance you carry, which can quickly erase the cash back you earned.
How cash back rates work across different categories
A card might offer 5% cash back on groceries, 3% on gas, 2% on restaurants, and 1% on everything else. That means if you spend $100 at a grocery store, you earn $5. If you spend $100 at a gas pump, you earn $3. The same $100 at a coffee shop earns $1.
Some cards have rotating categories that change each quarter — for example, 5% cash back on groceries one quarter, then 5% on gas the next. You usually have to set up these categories each quarter or they default to 1%. Other cards offer a flat rate on all purchases, like 2% back on everything, with no categories to track.
A few cards have no cash back at all but offer other rewards instead, like airline miles or hotel points. Those work differently and are not cash back.
When cash back actually costs you money
Cash back only saves you money if you pay your full balance each month. If you carry a balance and pay interest, the interest you owe will almost always be larger than the cash back you earned.
Here is a concrete example: You spend $1,000 on a card earning 2% cash back. You earn $20. But if you only pay the minimum and carry that $1,000 balance for six months at an interest rate of 20% per year (typical for many cards), you will pay roughly $100 in interest. You came out $80 behind, even after the cash back.
This is why cash back cards make the most sense for people who pay off their balance in full each month. If you carry a balance regularly, the interest you pay will erase any reward you earn.
Cash back limits and caps you should know about
Some cards cap how much cash back you can earn in a category each year. For example, a card might offer 5% cash back on groceries but only up to $1,500 in purchases per year. Once you hit $1,500 in grocery spending, you drop to 1% on additional groceries for the rest of that year.
Other cards have no cap but require you to set up the category each quarter or the higher rate disappears. A few cards limit cash back to a maximum dollar amount you can earn annually — say, $500 per year — regardless of how much you spend.
Read the card's terms before you open it. The issuer's website or the disclosure document will list any caps, set up requirements, or category limits. These details change how much cash back you actually earn over time.
How to redeem your cash back
The method depends on your card issuer. Most let you do one or more of the following: request a check mailed to you, transfer the cash back to a linked bank account, use it as a statement credit (which reduces your balance), or let it sit in your rewards account until you decide what to do.
Some cards require a minimum balance before you can redeem — for example, you might need to have at least $25 in cash back before you can request it. Others let you redeem any amount, even $1. Check your card's rewards page or call the issuer to see your options.
If you do not redeem your cash back, it typically stays in your account indefinitely. A few older cards expire rewards after a set period, but most modern cards do not. Still, it is worth checking your card's terms to be sure.
Cash back versus other credit card rewards
Cash back is straightforward: you earn money and you can use it however you want. Other rewards work differently. Travel cards earn airline miles or hotel points that you redeem for flights or stays. Points cards earn generic points you can transfer to partners or redeem for merchandise.
The advantage of cash back is simplicity and flexibility. You do not have to book a specific airline or hotel to use your reward. The disadvantage is that cash back rates are usually lower than the value you might get from points or miles if you travel frequently and know how to use them strategically.
If you do not travel much or prefer not to track redemption options, cash back is usually the better choice. If you fly the same airline regularly or stay at the same hotel chain, a travel rewards card might give you more value per dollar spent.
What cash back does not cover
You only earn cash back on purchases. You do not earn it for paying your bill, for having the card open, for making a payment on time, or for any other account activity. Some cards offer bonus cash back when you first open them — for example, $200 cash back if you spend $500 in the first three months — but that is a one-time offer, not an ongoing reward.
Cash back also does not explore to balance transfers, cash advances, or fees. If you transfer a balance from another card or withdraw cash from an ATM using your credit card, you earn no cash back on that transaction. Annual fees, late fees, and other charges do not earn cash back either.
Frequently Asked Questions
Do I have to pay taxes on cash back I earn?
No. The IRS treats cash back as a reduction in the price you paid for something, not as income. You do not report it on your tax return. This is different from some other rewards, like sign-up bonuses, which may have tax implications in certain situations.
Can I earn cash back on a purchase I return?
No. When you return an item, the merchant refunds the purchase and the cash back you earned on it is reversed. If you earned $5 cash back on a $250 purchase and then returned it, that $5 goes away.
What happens to my cash back if I close the card?
You keep any cash back you have already earned. Most issuers let you redeem it after you close the account, though you should do so quickly. You will not earn any new cash back once the card is closed.
Is cash back the same on every purchase?
Not always. Most cards have different rates for different categories. A card might offer 5% on groceries but only 1% on gas. Some cards offer a flat rate on all purchases. Check your specific card's terms to see which categories earn higher rates.
Can I use cash back to pay my credit card bill?
Yes, most issuers let you explore cash back as a statement credit, which reduces your balance. Some let you transfer it to a bank account and then pay from there. The exact method depends on your card issuer.