What does 1.5 percent cash back mean

If a credit card pays 1% cashback on all purchases, you could earn £50 if your annual spend is £5,000. But make sure you pay your balance off in full each month, otherwise the interest charges will almost certainly outweigh the benefits.

Each time you use the card, you earn a percentage of your spend back in the form of cashback.

For example, if your card pays 2% cashback and you spend £100 in a shop, you’ll earn £2.

This cashback is generally paid annually, though some cards will pay cashback on a monthly basis.

Most cashback cards credit the amount you earned onto your statement, reducing your credit card bill. Some cards send the cashback to a bank account so you can spend it, or let you convert it to points or vouchers.

Cash back refers to the money you stand to earn when you use your credit card. A cash back credit card offers a fixed percentage of the amount you spend on purchases as cash back. While you may earn a flat cash back rate across all purchases, it might vary depending on category-based spending. The best way to use cash back requires narrowing down on a cash back credit card that might work well for you.

The cash back you earn is a fixed percentage of the amount you spend.

Some credit cards offer higher cash back rates on category-based spending.

You might need to activate categories that come with higher cash back.

Cash back is a credit card benefit through which cardholders stand to earn some money when they use their cards to make purchases. Most prominent credit card companies provide cash back reward programs.

How cash back works is simple. When you use any cash back card to make a purchase, your card provider pays you a small percentage. The money you get is referred to as cash back. This is a fixed-percentage value and varies from one card to the next.

If you get a credit card that offers 2% cash back on all purchases, you’ll get $2 as cash back for every $100 you spend. For example, if you make a $950 purchase, you get $19 as cash back. You receive all the accumulated cash back you earn at the end of each billing cycle. So, if you’ve spent a total of $5,000 in a billing cycle with the same 2% cash back card, you’ll get $100 as cash back.

How Does Cash Back Work in Credit Cards?

There are many cash back credit cards out there, but not all would work equally well for you. Sure, they offer cash back and work like regular credit cards, but the cash back you stand to earn varies depending on the card you get. For instance, you may earn higher cash back when you spend across specific categories such as dining and gas.

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  These credit cards come with flat cash back rates that apply to all purchases. Examples include the Wells Fargo Active Cash® Card, which offers 2% cash back on all purchases, and the Bank of America® Unlimited Cash Rewards credit card, which comes with 1.5% on all purchases. With the Citi® Double Cash Card, you stand to earn up to 2% cash back — 1% when you make purchases and 1% when you make your payments on time.

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  With such cards, you earn higher cash back on spending across specific categories. Purchases that don’t qualify under bonus categories still earn basic cash back. For instance, the Savor Rewards Card from Capital One offers 4% cash back on dining, entertainment and popular streaming services and 3% at grocery stores. The Chase Freedom Unlimited Card offers 5% cash back on travel purchased through Chase Ultimate Rewards and 3% on dining and drugstore purchases.

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  These cards offer higher cash back rates on rotating spending categories — either every quarter or billing cycle — which cardholders typically need to activate in advance. For example, while the Chase Freedom Flex℠ Card offers 5% cash back on travel purchased through Chase Ultimate Rewards, it also offers 5% cash back on bonus categories you activate each quarter. This is also the case with the Discover it Cash Back Card. With the Citi Custom Cash℠ Card, you don’t have to select categories ahead of time or wait for a bonus calendar to be revealed. Instead, the card automatically applies 5% cash back on purchases in your top eligible spend category every billing cycle.

High Cash Back Rates up to Predetermined Limits

In almost all cases, cards that offer higher cash back rates on specific categories do so until a predetermined spend limit, after which the card’s regular cash back rate applies. For instance, Citi Custom Cash℠ Card’s 5% cash back rate on the top eligible spend category applies to the first $500 you spend every billing cycle. Spending over this limit comes with 1% cash back. And the Chase Freedom Flex℠ Card’s 5% cash back on bonus categories applies to combined purchases of up to $1,500 each quarter.

Do Cash Back Cards Actually Give You Money?

Yes, cash back credit cards actually reward you with money. Depending on the card you have, you may get a check from your card provider or transfer it to a bank account in your name. Some credit cards let you use the cash back rewards to make purchases through popular online platforms such as Amazon and PayPal. Others allow you to book travel through the card provider’s own travel portal. Other alternatives to redeem your cash back might include getting vouchers and gift certificates or making charitable donations.

Some cards let you set up automatic redemption of your cash back to a designated bank account. However, this might require reaching specific thresholds. For example, you may set up auto redemption of the cash back you earn through the Capital One Savor Rewards Card when you reach thresholds that start at $25.

Unlike some rewards cards that limit your ability to redeem points to a particular rewards program, cash back cards are known to offer much more freedom around what you may do with your cash back.

Can You Use Cash Back to Pay Credit Card Bills?

You may use your cash back to pay your credit card bill. This is because several cash back cards let you use the cash back you earn as a statement credit. If you’ve accumulated $100 worth of cash back and need to pay a $500 credit card bill, using your cash back would bring down the amount you currently owe to $400.

However, you might need to earn a minimum amount of cash back before you may use it as statement credit. For instance, you may use the cash back you earn through American Express’s Blue Cash Preferred Card or Blue Cash Everyday Card as a statement credit only when your available reward dollars balance is $25 or more.

You may apply your cash back as statement credit only on the credit card from which you earned it in the first place. To pay the bill of another credit card, you’ll need to withdraw your cash back into a bank account first.

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What Is the Best Way to Use Cash Back?

The best way to use cash back depends on individual preferences. For instance, if you’re running low on funds to pay your next credit card bill, you may consider using your cash back as a statement credit. Transferring your cash back into a bank account is also usually an option. On the other hand, if you’ve been meaning to do your bit toward furthering any particular cause, you may choose to donate your cash back to a charitable organization.

The Best Way to Use Cash Back Cards

If you hope to make the most of a cash back credit card, you need to start by paying off your bill in full each month. Otherwise, you would end up paying interest charges, which, in all likelihood, would exceed the amount you earn as cash back.

Since cash back cards work differently in the way they offer cash back, you might benefit by using more than one card to maximize your cash back earning potential. Here’s what you need to do to make the best possible use of your cash back credit cards.

1. Use a bonus or rotating category card each time you’re making a purchase from any of the applicable categories.
2. Use a flat-rate cash back card when you’re making purchases that don’t fall under any bonus categories.

Using a flat-rate card for purchases that don’t earn bonus cash back is a good idea because cards that offer higher cash back rates on particular categories tend to limit their cash back for regular purchases to 1%. With flat-rate cash back cards, you may earn up to 2% on all such purchases.

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To maximize your cash back rewards, review your spending patterns to determine where you spend the most money. Open a cash back credit card that offers higher rewards for those categories of purchases. -- Lee Huffman, credit card expert at BaldThoughts.com

Other Questions You May Have About Cash Back Cards

When considering a cash back card, it may be helpful to learn the answers to commonly asked questions about how cash back credit cards work.

You need to spend money to earn cash back, so it’s not really free money. Credit card companies that run cash back programs do so to incentivize people to use their credit cards. The money you stand to earn as cash back is simply a portion of the merchant fees that your card provider charges.

Is it bad to redeem cash back?

It’s not bad to redeem cash back. The cash back you earn, after all, is rightfully yours. In some cases, cash back expires after a predetermined time period, so it's best to redeem cash back rewards on a regular basis.

Should I use cash back to pay the balance?

You may use your cash back to pay part or all of your credit card balance, depending on the cash back you’ve accumulated and your existing outstanding balance. However, you might have other alternatives from which to choose as well.

How do I convert my credit card points to cash?

Depending on the credit card you have, you might be able to transfer the cash back you’ve earned into your bank account. Some cards let you set up automatic redemption to designated bank accounts.

What does it mean to activate cash back?

Some credit cards offer higher cash back rates across specific categories on a rotating basis for predetermined time periods. If you get any such card, there’s a good chance you’ll need to activate the categories in question before making purchases in those categories in order to qualify for the higher earning rates. This is the case with the Discover it Cash Back Card. The Chase Freedom Flex℠ Card retroactively applies the category bonuses to your purchases as long as you activate the quarterly bonus by the cutoff date.

Do cash back rewards expire?

With most credit card companies, your cash back expires only when you or the issuer closes your account, the reason notwithstanding. Some card providers have additional guidelines surrounding the expiry of cash back, so it’s best to go through the fine print. If you get a cash back credit card from Citi, for instance, your cash back would expire if you earn no cash back for 12 consecutive months. With U.S. Bank credit cards, cash back expires in 36 months from the time it's earned.

Why do credit cards give cash back?

Credit card companies offer cash back and rewards to encourage existing cardholders to use their cards and to attract new customers. Card providers still stand to make money through the merchant fees they earn, of which they offer only a small portion as cash back.

Is the cash back earned from credit cards taxable?

The cash back you earn through credit cards is typically not taxable, although there are exceptions in some scenarios. If you’ve earned cash back in the form of a bonus, either by spending money or by meeting a preset time-based spending criterion, it’s not taxable. One example is if you need to spend at least $500 in the first three months to earn $50 as bonus cash back. Your everyday spending that earns cash back qualifies as non-taxable well.

But if you get cash back from your card provider without having to spend any money, like when you refer a friend to open a new credit card, it will be taxable. Another example is when you are offered a $100 cash back bonus upon signing up for a new card without needing to spend any money. This will count as income and will be taxable.

Which small business cards give cash back for credit card purchases?

Some of the best small business cards that give cash back for purchases include the Ink Business Cash® Credit Card, the Capital One Spark Cash Card for Business, the Discover it Business Card and the American Express Blue Business Cash Card.

Will credit card companies mail your cash rewards as a personal check? If so, which cards offer this?

Some credit card providers offer to mail cash back rewards as personal checks, such as Bank of America, Citi and Capital One.

Who had the first cash back credit card?

The Discover Card introduced by Sears in 1986 holds the distinction for being the first cash back credit card in the United States.

Do cash back or mileage credit cards typically have higher interest rates?

Cash back and other rewards credit cards tend to have higher interest rates than cards that offer no rewards. However, most credit cards come with variable annual percentage rates (APRs), and the APR that applies to your card depends on your creditworthiness.

Now that you know how credit card cash back works, determine if you might benefit from getting a cash back card after accounting for your spending habits. If you decide to move forward, compare your alternatives across parameters such as cash back rates, annual fees, APRs and added perks.

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The MoneyGeek editorial team ensures that it answers all your credit card-related questions in a quick and efficient manner. It does this by staying on top of the latest changes surrounding credit card offers and regulations. Whether you wish to look for student credit cards that offer cash back or credit cards for fair credit, you may trust them to guide you in the right direction.

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