What cash back means and how you get it

A cash back credit card returns a percentage of what you spend back to you as money. When you use the card to buy something, the card issuer — the bank or company that issued the card — pays you a small cut of the transaction fee they collect from the merchant. That cut becomes your cash back reward.

The cash back appears as a credit on your account statement, usually once a month. You can use it to reduce your balance, request it as a check, transfer it to a linked bank account, or sometimes use it to buy things directly through the card issuer's website. The exact options depend on which card you have.

Cash back is different from points or miles because it has a fixed dollar value. One percent cash back always equals one cent per dollar spent, whereas points might be worth different amounts depending on how you redeem them.

Key Takeaways

  • Cash back is a percentage of your spending that the card issuer returns to you, usually between 0.5 and 5 percent depending on the card and category.
  • You only earn cash back on purchases you actually make — you do not earn it simply by holding the card or paying your bill on time.
  • Cash back is taxable income in the year you receive it, though most cardholders do not report it because the IRS does not require issuers to report small amounts.
  • You must pay your credit card bill to keep the account open and avoid interest charges that will cost far more than any cash back you earn.
  • Different cards offer different rates for different categories — groceries, gas, restaurants — so the card that pays the most depends on where you spend the most money.

How the percentage works and what it depends on

Cash back rates vary by card and by what you buy. A card might offer 1 percent cash back on all purchases, meaning you earn one cent for every dollar spent anywhere. Another card might offer 3 percent on groceries, 2 percent on gas, and 1 percent on everything else.

The rate also depends on whether you have a premium version of the card. Some issuers offer a standard card with lower cash back rates and a premium card with higher rates, though the premium card usually costs an annual fee. Whether that fee is worth it depends on how much you spend in the high-reward categories.

Rates can change. Card issuers sometimes lower cash back percentages or add restrictions to which purchases may have access to. They announce these changes in writing before they take effect, usually giving you 30 to 60 days' notice. If you disagree with a change, you can close the card without penalty.

When cash back does not count toward your spending

Cash back only applies to purchases you make with the card. It does not apply to balance transfers — moving debt from another card to this one — or to cash advances, which are withdrawals of actual cash from an ATM or bank. Those transactions usually have their own fees and higher interest rates.

Some cards exclude certain types of purchases from cash back entirely. Common exclusions are wire transfers, cryptocurrency purchases, gambling, and payments to other credit cards or loans. Check your card's terms to see what counts.

If you return something you bought with the card, the cash back for that purchase is reversed. The issuer subtracts it from your account, so you only keep the cash back for the amount you actually kept.

How to actually receive your cash back

Most cards deposit cash back into your account automatically once a month or once a quarter. You then choose what to do with it. The most common options are to let it sit as a credit on your statement, request a check, or transfer it to your bank account.

Some cards let you redeem cash back in smaller amounts whenever you want. Others require you to wait until you have earned a minimum amount — often $25 or $50 — before you can cash out. A few cards let you use your cash back balance to pay for purchases directly, like a store credit.

Cash back that sits unused on your account does not expire on most cards, though some issuers do set an expiration date. Read your card agreement to see whether your cash back has a time limit. If it does, the issuer will tell you how long you have before it disappears.

Why cash back costs you nothing extra

The cash back you earn comes from the merchant fee, not from you. When a store accepts a credit card, it pays the card issuer a percentage of the sale — typically 1.5 to 3 percent — to cover the cost of processing the transaction and taking on the risk of fraud. The card issuer uses part of that fee to pay your cash back.

This means you do not pay anything to earn cash back. The store does not charge you more because you used a cash back card. Your credit card bill is the same whether you earn 1 percent cash back or nothing. The only cost to you is the interest you pay if you carry a balance month to month.

That interest is the trap. If you spend $1,000 and earn $10 in cash back but then pay 20 percent interest on the $1,000 balance, you will owe $200 in interest charges. You have lost $190 on the deal. Cash back only makes sense if you pay your full balance every month.

The tax situation with cash back

Cash back is technically taxable income. The year you receive it, it counts as money you earned. However, the IRS does not require card issuers to report cash back to you or to the government unless it exceeds $20,000 in a single year and you have more than 200 transactions. Almost no individual cardholder hits that threshold.

Because issuers do not report it, most people do not report it either, and the IRS does not pursue it. If you are self-employed or file a detailed tax return, you may want to include it. If you have questions about your specific situation, a tax professional can advise you.

Cash back versus other rewards on the same card

Some cards offer both cash back and other rewards like points or miles. When that happens, you choose which reward you want to earn on each purchase, or the card automatically earns one or the other depending on the category. A card might earn 2 percent cash back on groceries but 3 points per dollar on restaurants, for example.

Points and miles are usually worth less than their cash back equivalent because they have restrictions on how you can use them. A point might be worth 0.5 cents if you redeem it for a gift card but 1 cent if you use it toward a travel booking. Cash back is always worth exactly what it says.

If a card offers both, compare what you actually spend money on. If you fly frequently and want to use points toward tickets, the points might be worth more to you than cash back. If you just want money back, cash back is simpler.

Frequently Asked Questions

Do I have to spend a certain amount to earn cash back?

No. You earn cash back on every purchase you make with the card, no matter how small. There is no minimum spending requirement. Some cards offer bonus cash back if you spend a certain amount in the first few months, but that is separate from the regular cash back you earn on all purchases.

What happens to my cash back if I close the card?

Cash back you have already earned stays yours. You can redeem it before you close the card or after, depending on the issuer's rules. Some issuers let you redeem cash back for up to a year after you close the account. Check your card agreement or call the issuer to confirm.

Can I earn cash back on someone else's purchase if I use my card?

Yes. You earn cash back on any purchase you make with your card, regardless of who benefits from the purchase. If you buy groceries for a friend or pay a bill on their behalf, you still earn the cash back. The cash back belongs to you, not to them.

Does paying my bill on time earn me extra cash back?

No. Cash back is based only on what you purchase, not on how you pay. Paying on time is important because it keeps your account in good standing and avoids interest charges, but it does not earn you additional rewards. Some cards offer bonus points for on-time payments, but those are separate programs.

What if my card has a yearly fee — is the cash back worth it?

That depends on how much you spend in the high-reward categories. If a card costs $95 per year but earns 3 percent cash back on groceries and you spend $5,000 on groceries yearly, you earn $150 in cash back, which covers the fee and leaves you $55 ahead. If you spend $2,000 on groceries, you earn $60 in cash back and lose $35 to the fee. Calculate your own spending to see whether the fee makes sense for you.