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Cash Back

How cash back credit cards work

Earn cash back at a flat rate, in rotating bonus categories or on specific purchases


We look at how cash back credit cards work, offering an overview of flat and tiered earning structures for cash back credit cards and breaking down the three components of cash back – cash back rate, where extra cash can be earned and how rewards are delivered.

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The Bank of America content was last updated on January 4, 2021.

What could be easier than getting a little money back on the everyday spending you put on your credit card? That is how cash back cards work and what makes them appealing to some consumers.

“The primary benefit of a cash back card is the simplicity,” says Roman Shteyn, owner and CEO of

“You don’t have to think too much about how much you’re earning while using the card, and when it comes to redemption, the best cash back credit cards are pretty straightforward. Most people just deduct their cash back from their statement balance or redeem for gift cards.”

Cash back cards come in a variety of flavors – bonus category, tiered rewards and flat percentage cash back cards – but they all pay you back. While a flat percentage cash back card is ideal for the “set it and forget it” crowd, bonus category and tiered rewards cards offer more rewards but require more work to maximize cash back in select spending categories.

How cash back cards work

How do all of these cash back cards work? Cash back is essentially a rebate of a percentage of the purchases you make on the card.

Card issuers can afford to pay cash back because merchants pay an interchange fee on each transaction. “When you pay a merchant $100 with a credit card, the merchant only receives about $97,” says Daniel Mahoney, a certified financial planner in Atlanta.

For example, a TV that costs $700 would net you $14 with a 2% cash back card. The merchant, meanwhile, paid a transaction fee of around $21 when you paid with your credit card.

“Rewards or rebates may also be funded by deals between the credit card issuer and specific merchants,” Mahoney adds. An example of this is cash back earned through card-linked offers.

With flat-rate cash back credit cards, every purchase earns the same percentage cash back. With category bonus cards and tiered bonus cards, different types of spending earn more cash back.

How do card issuers know what types of spending qualifies for which percentage of cash back? Merchant category codes are four-digit numbers denoting a business type, such as a gas station or grocery store. Merchant category codes are used by credit card networks to categorize and track purchases.

Cardholders can redeem cash back as a statement credit or deposit in a banking account, to purchase gift cards or merchandise, or donate their rewards.

Check with your card issuer’s rules on cash back redemption amounts and options. The Costco Anywhere Visa® Card by Citi, for example, issues rewards annually as a certificate with the February statement.

Why cash back cards? They trump bank account interest rates

With bank interest rates still low – a typical savings account earns a measly 0.09% annual yield – the ability to earn even 1% on every purchase trumps the best bank interest rates. Your return is even greater with cash back cards offering a flat 1.5%, 2% or more on every purchase.

And unlike the interest on your bank account, cash back comes tax-free.

“The IRS has historically viewed credit card cash back as a nontaxable rebate on the purchase price, rather than as a taxable form of income,” says Mahoney.

Something else to think about: Cash back, if loaded back on your card, also earns its own cash back when you spend it, adds financial planner Andrew Feldman of Chicago. “It’s a fraction, but it’s still a little more cash,” he says.

Factor in that some cash back cards offer sign-up bonuses of $150 or $250, and that is even more cash for you for using the card.

Let’s take a look at the three types of cash back cards, and the work (or simplicity) involved in using them to earn the maximum rewards. Spoiler alert: According to our cash back credit cards survey, complex is out and simplicity is in.

3 types of cash back cards

1. Category bonus cash back cards

Category bonus cash back cards offer the lure of 5% cash back from revolving spending categories. Cash back cards with rotating bonus categories include the Discover it® Cash Back, Discover it® Student Cash Back and Chase Freedom cards.

Five percent back can be a nice haul if you’re able to max out the spending categories each quarter, but it takes a bit of work.

First, you have to register for the bonus categories every three months, and spending in the categories is capped per quarter at $1,500 in purchases. Since any purchase not in the bonus category earns 1%, you may not be getting the average return you think you are.

Also, with the Discover and Chase Freedom cards, bonus categories are set by the issuer every quarter and are usually released a few months before the new quarter starts.

For 2020, Discover has already released its full year of bonus categories. Chase Freedom released its second quarter 2020 bonus categories in March.

The U.S. Bank Cash+ Visa Signature Card is a variation on the rotating bonus category theme, but the cardholder picks the bonus categories that will earn the most cash back for the types of purchases they make most.

2. Tiered rewards cash back cards

Like category bonus cards, tiered rewards cards offer more cash back in select spending categories, but to maximize your earnings you have to think about which card to use with each purchase.

For example, the Blue Cash Preferred® Card from American Express offers 6% cash back at U.S. supermarkets (up to $6,000 in purchases per year, then 1%), 3% cash back at U.S. gas stations and 1% cash back on all other spending.

Feldman puts all his business expenses on his tiered rewards American Express SimplyCash Plus business card and his own personal expenses on a Citi® Double Cash Card that delivers a flat 2% (1% when you buy and 1% as you pay for your purchases).

His AmEx business card rewards 5% on office supply stores and wireless telephone service, 3% on gas (cardholders choose from eight categories for this tier) and 1% on everything else.

At the end of each year, Feldman calculates the rewards delivered on the total amount he spent. He says both of his cards end up delivering the same cash back on average.

“The AmEx works out to about 2%, maybe slightly under,” Feldman says. “I just don’t spend enough on office supplies to max out that 5% category.”

“Could I get back another couple dollars at the end of the year by using a credit card targeted to each category of my spending?” Feldman asks. “It’s possible, but I’d have to think about which card to use every time I made a purchase and that would make my life crazy.”

3. Simple cash back cards

With simple cash back cards, also called flat-rate cash back cards, you earn a flat percentage with every purchase. There’s no need to track and activate bonus categories. You earn the same cash back on every purchase.

Mahoney carries the Bank of America® Travel Rewards credit card which earns 1.5 points per dollar (effectively 1.5% cash back) plus a 75% bonus for being part of the bank’s Preferred Rewards Platinum Honors program.

“That’s effectively 2.625% cash back*,” Mahoney says. “The caveat is the cash back must be used as a reimbursement for travel purchases**, but lots of things count for that, even Uber and Lyft.”

Feldman recently switched from the Capital One Quicksilver Cash Rewards Credit Card, which offers 1.5% cash back, to the Citi® Double Cash Card, which earns up to 2% cash back (1% when you buy and 1% as you pay for your purchases).

Why did he switch? “2% is better than 1.5%,” he says.

Also, “I miss the convenience of being able to log in and get my rewards in one sweep or set it up for an automatic $25 or $50,” he adds. “I like to cash in my points immediately so I don’t forget about them.”

Frequent-flyer expert Gary Leff likes the Fidelity Rewards Visa and Citi Double Cash cash back cards.

With the Fidelity Rewards Visa, cardholders earn 2% on all purchases, but you need to be a Fidelity account holder with excellent credit to qualify for the card.

“Most people aren’t going to beat 2% cash back, even with travel rewards,” says Leff, who blogs at View from the Wing.

*2.625% cash back referencing 1.5 points per dollar plus 75% boost for Preferred Rewards program.

**Travel or dining purchases 

How to choose a cash back credit card

Which cash back card is right for you depends on how much thought you want to put into which card to use where.

While some cash back cards offer outsized bonuses on specific types of purchases or in rotating bonus categories, you’ll have to remember to use the right card at the right time and place. Not only will you need to pay attention to your account to see how your issuer categorized your purchase, you may need to manually enroll in a bonus category each quarter to reap the benefit of certain cards.

This makes such cards less than ideal if you’re looking for more of a “no-fuss” way to earn rewards. Additionally, most tiered and category bonus cards only get you 1% cash back on general purchases. Unless you spend heavily in a card’s bonus categories, you could be missing out on maximizing rewards on the majority of your spending.

Flat-rate cards, on the other hand, may offer a lower rewards rate in a specific category like dining or groceries, but will help you score extra rewards on general purchases that don’t fall into a specific category, boosting your average cash back rate overall. This is why it’s also worth considering pairing a flat-rate cash back card with a tiered bonus card that fits your spending habits.

We ran the numbers to see how flat rate, category bonus and tiered bonus cash back earnings would break down based on an average American’s spending (drawn from a Bureau of Labor Statistics consumer expenditures survey):

Flat cash back versus bonus category versus tiered bonus cards

2% flat percentage5% category bonus*6% tiered bonus**
$21,897*** at 2%$14,645 at 1% ($14.65)$16,596 at 1% ($16.59)
$6,000 at 5% ($300)$4,464 at 6% ($267.84)
$437.90 in cash back per year$314.65 in cash back per year$284.43 in cash back per year
* This assumes the category bonus cardholder maxes out the $1,500 in qualified quarterly spending, which is difficult to do every quarter.
** The Blue Cash Preferred from American Express offers 6% cash back at U.S. supermarkets and other tiered rewards, so total cash back will be higher.
*** This includes expenses on food, gas and oil changes, vehicle expenses, apparel and services, entertainment and other expenditures
– research, March 2020


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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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