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What Is Cash Back? A Beginner’s Guide

Hanna Kielar6-Minute Read
July 05, 2022

Do you have a debit card or maybe even a credit card? Your answer is likely yes.

Debit and credit cards are convenient tools that have shaped how we make purchases without needing cash. However, products or services can be costly, especially due to inflation, and because of that, you might often be looking for ways to save money on spending. This is why credit card companies created cash-back offers.

Cash back encourages you to make purchases on a specific card to get a reward. You can use cash back for credit and debit cards. In this article, we’ll dive into how cash back works for both cards – and the different ways you can earn and redeem cash back. 

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What Does Cash Back Mean?

A cash-back credit card offers the chance to earn cash rewards from a certain percentage of your credit card purchases. In other words, it’s a type of credit card with a rewards program that gives you money back or discounts on what you spend. There are also cash-back debit cards.

In most cases, the cash-back credit card provides you cash-back rewards for special purchases depending on the provider, such as rewards for food and gas fuel. It’s important to note that most credit cards with this option let you redeem your rewards through a check, statement credit or bank transfer.

How Does Cash Back Work For Credit And Debit Cards?

The process through which you receive your cash-back rewards depends on whether you’re using a credit card or debit card. Let’s take a look at how it works for both.

Cash-Back Credit Card

For a cash-back rewards program, your credit card company returns a percentage of money spent on purchases as a reward for you, which can help reduce your bill. The program you’re participating in will determine how you receive the money. For example, some cash-back credit cards may send the money directly to your bank account, while others may let you convert the cash to reward points or vouchers.

The type of program you use is also contingent on how many rewards you can receive. You should note that some programs may offer you the same reward percentage on every type of purchase, whereas others may give a bonus cash back for specific incentive goods or services. With this program, you can earn a certain dollar amount per transaction or cash back by participating in deals, such as buying specific products with the credit card that a company advertises.

Cash-Back Debit Card

As we’ve noted, cash back is also available for debit cards – but it works a little differently. With a cash-back debit card, you’ll earn rewards like a credit card when you purchase a product or service, but the key difference is where the money comes from. Once you buy something with your debit card, that money is taken from your account right away. This is different than a credit card cash-back service, where you use your debt to receive an award.

Simply put, with your cash-back debit card, you’re receiving rewards on money that’s already in your checking account rather than money you borrow.

What Different Types Of Cash Back Are Available?

Before deciding which card is the most suitable option for you, it’s helpful to understand the different cash-back cards available for purchase and how each one works. The various types of cards you can choose from include the following:

  • Flat rate: A flat rate card is a card where you receive the same percentage of rewards on eligible purchases regardless of the spending type or category. As this card’s name suggests, your fee is flat, or fixed. This is the most common type of cash-back credit card.
  • Bonus categories: A credit card that has a bonus category, also known as a tiered rate, offers higher percentages of cash back depending on the type of purchase. It can help you earn more money than a flat rate card.
  • Rotating categories: Similar to a bonus category, this type of card also offers higher cash-back percentages on certain types of purchases. Still, it's essential to understand that these categories rotate every quarter, so you must activate the rotating categories before you’re eligible to earn rewards.

Where Does Cash Back Money Come From?

The money you get in a cash-back service comes directly from the card company that places the rewards into your specified bank account (your savings account or checking account). The rewards are stored on your account until you choose to use them, although some may expire after a set amount of time.

Credit card companies are able to give you these rewards because merchants must pay a percentage of the transaction amount to the company when a credit card is used to make a payment. This is how the company receives its funds.

The Pros And Cons Of Cash-Back Cards

There are several benefits and drawbacks to using a cash-back card, depending on your financial situation, personal budget and needs. Before you select a card, let’s look at some of the pros and cons you should consider.


  • They offer you special cash-back deals. A cash-back program gives you a portion of your money back from the purchase(s) you made, and in some cases, you may be offered a better rate depending on what you buy.
  • They can give you a cash bonus. When you spend a specific amount of money on your credit card over a certain period of time, many credit card issuers will give you a cash bonus.
  • They may provide you with additional benefits. Some cash-back credit cards offer you added benefits (for example travel insurance, annual travel credit, etc.), and several cards also don’t require an annual fee.
  • High credit scores can help you down the line. You’ll qualify for credit cards with the best rewards when you have a higher credit score.


  • Rewards from your card can expire. In some cases, your rewards can expire due to account inactivity, late payments or even account closure. Because of this, it’s essential to know what’s happening with your credit card account.
  • Credit card companies may request annual fees. Many cash-back credit cards will charge you an annual fee, so it’s crucial to calculate the costs and look at the benefits offered to determine whether it’s worth it.
  • Many may instate a cash-back cap. For credit cards, some issuers may cap the amount you can receive in cash-back rewards every year.

This sounds like a signing bonus, not a cash back bonus.

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What Is The Difference Between Cash Back And A Discount?

The main difference between cash back and a discount is that cash back is a reward you earn for making a purchase, whereas a discount reduces the cost of your purchase upfront. In other words, in discount offers, a company sets a lower list price on an item, allowing you to pay less money for it – but with cash back, you must pay the total cost. Then, once that transaction finalizes, you can get some money back through rewards.

How To Use Your Cash-Back Rewards

There are several ways to use your cash-back rewards and bonuses:

  • Statement credit: Remember that your cash back will be applied to your credit card’s balance. Because of this, you should consider using your cash back to help you pay that balance and redeem your rewards in the form of statement credits.
  • Transfer rewards: You can transfer cash-back rewards to a bank account, or even move bonuses to a charity of your choice.
  • Rewards points: It’s important to note that some cards are linked to the card issuer’s rewards program, allowing you to convert cash rewards or use them as points instead of requesting cash back.
  • Online checkout: When making purchases online, some issuers allow you to use your cash-back bonus to pay for the purchases. Also, some issuers may offer additional money as an incentive to pay with the card.

The Bottom Line: Determine Your Needs Before Applying For A Cash-Back Card

To determine whether investing in a cash-back card is a good move, you should do your research. We recommend that you have a solid understanding of the different types of cash-back cards available before buying one – this will help you distinguish which program will be the most financially beneficial for you.

Finding the best cash-back card depends on your qualifications and what you’re looking for as an individual. Learn about the best cash-back credit cards to help you get started today.

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Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.