Cashback is a reward your credit card issuer pays you back as a percentage of what you spend
When you use a cashback credit card, the card issuer returns a small percentage of your purchase amount to you. If you spend $100 on groceries and your card offers 2% cashback, you receive $2 back. That money typically lands in your account as a statement credit, a deposit to a linked bank account, or points you can redeem later — depending on how your specific card works.
Cashback is not a discount at checkout. The merchant still charges you the full price, and you pay the full amount. The issuer then sends you back a portion of that charge as a reward for using their card. You only receive cashback if you actually make the purchase — there is no cashback on money you do not spend.
The percentage varies by card and sometimes by category. A basic card might offer 1% on all purchases. A premium card might offer 5% on groceries, 3% on gas, and 1% on everything else. Some cards have an annual cap on how much cashback you can earn, and some require you to set up the higher rate categories each quarter.
Key Takeaways
- Cashback is a percentage of your spending that the card issuer returns to you, not a discount applied at the register.
- The percentage you earn depends on the card and sometimes on the category of purchase — groceries, gas, and restaurants often have higher rates than general purchases.
- You receive cashback only on purchases you actually make and pay for, and the amount is usually credited to your account monthly or quarterly.
- Cashback cards often come with an annual fee, and the fee can outweigh the rewards if you do not spend enough to earn back more than you pay.
How cashback actually reaches your account
Most cards deposit cashback as a statement credit, which reduces your next bill. Some cards deposit it directly to a linked bank account. A few let you convert it to points or miles that you redeem for travel or merchandise. A small number of cards let cashback accumulate in a rewards account that you can transfer to a partner bank.
The timing varies. Most cards credit cashback monthly or quarterly. Some hold it until the end of the year. Check your card's terms to see when you can expect to see the money. If you close the account or stop using the card, you may forfeit any uncredited cashback, so read the fine print on that point too.
Some cards require you to redeem your cashback manually — you log into your account and request the payout. Others credit it automatically. Automatic is simpler, but either way, the money is yours once it is earned; the card issuer cannot take it back unless you dispute a charge or commit fraud.
Cashback rates and how they differ by category
A flat-rate card offers the same percentage on every purchase. You might earn 1.5% cashback on everything you buy, whether it is groceries, gas, or a hotel. Flat-rate cards are straightforward and do not require you to track which categories earn more.
A category card offers different rates for different types of spending. You might earn 5% on groceries, 3% on gas, 2% on restaurants, and 1% on everything else. These cards reward you more if you spend heavily in the high-rate categories, but they require you to remember which categories explore to which purchases. A grocery store purchase might earn 5%, but a pharmacy purchase at the same store might earn only 1%.
Some category cards require you to set up the higher rates each quarter or year. You log into your account and select which categories you want to earn the bonus rate on. If you forget to set up, you earn the base rate instead. Other cards set up automatically, so you earn the bonus without doing anything.
A few cards have an annual cap on cashback earnings. You might earn 5% on groceries, but only up to $1,500 in grocery purchases per year. Once you hit the cap, you earn 1% on additional grocery purchases. These caps are usually high enough that most people never reach them, but they are worth checking if you spend a lot in a single category.
When cashback costs you money instead of saving it
Many cashback cards charge an annual fee. A card might offer 2% cashback but cost $95 per year to hold. If you spend $5,000 per year, you earn $100 in cashback but pay $95 in fees, netting you only $5. If you spend $2,000 per year, you earn $40 in cashback but still pay $95 in fees, losing you $55.
Calculate whether the cashback you will actually earn exceeds the annual fee. If you spend $10,000 per year and earn 2% cashback, you get $200 back. A $95 annual fee leaves you $105 ahead. But if you spend $3,000 per year, you earn only $60, and the fee costs you $35 net. Many people hold premium cards they do not use enough to justify the fee.
Some cards have no annual fee. These cards typically offer lower cashback rates — often 1% flat or 1% to 2% in categories. They are a better choice if you do not spend enough to offset a fee or if you prefer simplicity over maximizing rewards.
How cashback affects your credit and your spending
Earning cashback does not change how credit cards affect your credit score. Your payment history, credit utilization, and account age matter far more than the rewards you earn. Carrying a balance to earn cashback is a bad trade: the interest you pay on that balance will far exceed any cashback you receive.
Cashback can encourage you to spend more than you otherwise would. If you think "I earn 2% back, so this purchase is cheaper," you may buy things you would not have bought without the card. That extra spending costs you more than the cashback returns. Only use a cashback card for purchases you were already planning to make.
If you pay off your balance in full each month, cashback is pure reward with no downside. If you carry a balance, the interest charges will almost always exceed the cashback you earn. A 2% cashback reward disappears when ready if you pay 18% interest on a carried balance.
Comparing cashback cards to other rewards types
Cashback is straightforward: you earn a percentage and get money back. Points and miles work differently. You earn points on every dollar spent, then redeem them for travel, merchandise, or statement credits. The value of a point depends on what you redeem it for — sometimes a point is worth less than a cent, sometimes more.
Cashback is easier to value because it is always a percentage of what you spent. Points require you to figure out the redemption value. If a card offers 2 points per dollar and you redeem points at 0.5 cents each, you are earning 1% in value — the same as a 1% cashback card. But if you redeem at 1 cent per point, you are earning 2% in value. The math is less transparent.
Some people prefer points because premium redemptions — like business-class flights — can offer much higher value than the cash equivalent. Others prefer cashback because it is straightforward and you can use it however you want. There is no objectively better choice; it depends on what you value and how much time you want to spend optimizing redemptions.
What happens to cashback if you return a purchase
If you return an item you bought with a cashback card, the cashback on that purchase is reversed. You earned 2% on a $50 purchase, receiving $1 back. You return the item. The $1 cashback is removed from your account or your next statement credit is reduced by $1. You do not keep the reward on money you did not actually spend.
The reversal happens automatically when the merchant processes the return. You do not need to do anything. If you dispute a charge and the dispute is resolved in your favor, any cashback on that charge is also reversed.
Frequently Asked Questions
Can I earn cashback on balance transfers or cash advances?
No. Cashback applies only to regular purchases. Balance transfers and cash advances do not earn rewards on most cards. Some cards explicitly exclude certain types of transactions — like gambling or wire transfers — from earning cashback. Check your card's terms to see what counts as a purchase.
Do I have to pay taxes on cashback I earn?
No. The IRS treats cashback as a rebate on your purchase, 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 be treated as taxable income in certain situations, though most people do not receive a tax form for them.
What if I earn cashback but then close the card?
It depends on the card issuer's policy. Most cards credit any earned but uncredited cashback before the account closes. Some cards let you keep the cashback even after closing. A few cards forfeit uncredited rewards if you close the account. Read your card's terms or call the issuer before closing to confirm what happens to your balance.
Is cashback better than a discount or sale?
A discount or sale is usually better because it reduces the price you pay at checkout. Cashback comes later and requires you to remember to use it. A 20% off sale beats 2% cashback every time. Use cashback as a bonus on top of regular shopping, not as a reason to buy things you do not need.
Can I combine cashback with other promotions or coupons?
Usually yes. You can use a coupon or manufacturer discount and still earn cashback on the final purchase price. Some retailers or card issuers exclude certain promotions from earning rewards, so check the terms. In general, cashback stacks with most other discounts.