logo

How Does Cash Back Work? All You Need to Know

how does cashback work image 1

Table of Contents

Shop smart

Click or scan to download

Nobody likes spending excessive amounts of money. Be it Elon Musk, or your neighbor down the street. Fortunately, banks have stimulated spending money with credit cards at grocery stores, movie theaters, sports events, etc. over the years, with one very swift move – cash back.

Well, what’s the trick? Where does this money come from? In this article, we will review what cash back is, how it works, use cases, and 4 ways to earn some money back.

 

What is Cash Back?

Cashback is a way of getting money back when you’re buying something, and it’s a feature that some credit cards have. Instead of paying the full price for things you buy with your credit card, you get a percentage of that cash back.

Credit cards with cash back rewards offer a certain percentage of every qualifying purchase back. For example, if you buy a pair of shoes with your credit card that offers one percent cash back, you’ll receive one percent of the amount you spent on the boots back into your account.

While not every credit card and bank works with the same percentage, typically it’s between 1-2% on average, with some unique campaigns in which you can earn even a more considerable rate.

This is not an enormous amount of money, but the bigger your credit card bill, the more significant the saving you can potentially make. If you make $2 per 100 spent, imagine what will happen if you spend $10,000. That’s $200 out of nowhere.

However, you should pay attention to the condition set by credit card issuers, before you go on a shopping spree. Some of them have limits (for example, up to $5,000 or $6,000 are eligible for earning some money back).

 

How Does It Work?

As the name indicates, cash back is money you receive in some way – be it via rewards, money back into your account, or any other means.

Cash back credit cards are just one of many rewards credit cards out there, but this type of card is so popular because it can pay out at a high rate. For example, you can earn 5% cash back on your first $1500 in purchases every month. These rewards can also help you avoid paying interest charges or come close to them since they pay out money you would have otherwise spent.

All you need to do is find out if the grocery stores, gas stations, or other businesses that you regularly shop from are eligible for cash back, as banks don’t redeem cash from every place out there.

 

How Do Credit Cards that Offer Cash Back Work?

There should be something for the bank, as cash back doesn’t come for free. You know the old saying:

Money doesn’t grow on trees.

That’s also valid here. Each credit card company (like VISA, Mastercard, and Amex) makes its money by applying a transaction fee on card payments (it’s floating, but let’s assume it’s around 3%).

Since these companies are interested in you paying with a card rather than cash, they incentivize banks as mediators to offer you something in return. But banks also have another benefit – to promote their credit cards.

As we stated in the last point, not every place you shop from is eligible for rewards. There is a criterion that should be met. Let’s see some of the common rules that apply:

  • Unapproved stores – if you’re shopping from your local cafeteria, you might not receive a cash back, as the store is not recognized as a trusted seller.
  • Money exchange – if you use your money to exchange for another fiat currency, you won’t receive money back, as you are not spending money.
  • Gambling – gambling or anything associated with betting is among the spending categories that won’t qualify as eligible.

4 Ways to Earn Rewards

 

1. Credit Cards

We have already mentioned credit cards as the main way to receive money back, and if you’re not using cash back cards, you’re literally wasting money. It’s the most straightforward way to get a percentage of almost everything you purchase. You can usually get 2-3% if you have good credit scores.

 

2. Rewards Sites

Another trend is rewards sites. They make things easier. Instead of getting a new credit card issued in your name and thinking of potential issues with interest and overspending, you can use rewards sites such as Monetha, where you receive awards for every purchase you make. You can then spend the cash rewards on gift cards from major shops and services, donate to charity, and even convert to crypto (visit Monetha now).

 

3. Coupon Websites

You can find fantastic promotional codes and offers on sites like Groupon, Livingsocial, and Rakuten. Not only will you receive a great deal on your purchases, but you can also earn money back in the form of discounts or rewards.

 

4. Post-Purchase

Post-purchase services provide cash back on purchases. The most common scenario is to get a percentage back after shopping, but you can also receive an extended warranty or join the lottery for free tickets to Paris or a new car. Some of these services are run by the stores you buy from.

 

How to Use Your Rewards?

Once you have generated enough cashback balance, then it is probably time for the sweetest part – to spend it somewhere. But where can you spend it?

 

As a Statement Credit

If you have a mortgage or some credit card debt, you can cover some of it with cash back. The way it works is simple: it funds your available balance.

For example, you owe your bank $200 each month for a small housing decoration loan. When you generate $50 in cash back, in your statement credit report you will find the number -$150 instead of -$200, as a small portion, is absorbed by the rewards.

 

As an Available Balance

That’s certainly better than having a debt. Instead of financing your debt, you earn money that goes straight to your bank account, thus increasing your available balance.

Let’s say you have $1,000 available in your bank and have $100 redeem rewards. Once you receive them, you’ll have $1,100 to spend.

 

As a Gift Card

One common way to redeem the money you got back is via a free credit for online shopping on Amazon, eBay, or other places. The gift card is a fixed amount that you can use either once or multiple times until the credit runs out.

There is one condition, though. The only way to pay the difference is by card.

 

As a Donation

It’s always a good idea to donate money to charity, and rewards are a good option to spend some money on good deeds without breaking the bank. In fact, you will pay a grand total of $0 of your own funds, but you will help people in a need.

 

When is a Good Idea to Have a Rewards Credit Card?

Before we talk about the best credit cards for getting cash back on the market, you need to decide for yourself if you’re up for it. Let’s see the ideal situation in which it’s worth having a go:

  1. You have good credit health – if you have an acceptable credit history, you will be able to access more rewards opportunities and grab better deals. This means you’ll have lower interest rates and much better paybacks.
  2. You are disciplined – credit cards are a big gamble in the wrong hands. Failing to meet the deadline means you will pay brutal APRs which will often overshadow any perks of having cash back options.
  3. You have shopping patterns – in order to get the best value out of your credit card provider, you have to shop from the same places to keep collecting points.

What are the Best Cash Back Credit Cards?

Here are a few options that we consider to be the best and offer the best rewards:
s

1. Discover it®

This is the best option for huge spenders. You can get up to a 5% reward rate which is quarterly rotating spending categories. It comes with an impressive 0% annual fee and no minimum cashback redemption. It requires you to have a Credit Score of at least 700, and has a standard APR starting from 12.24%.

 

2. Capital One® Walmart Rewards® Card

There is a sweet 5% bonus for the first 12 months of using the credit card. On top of that, there is a great 2% cash back that you can use for hotel stays and restaurants, which make it a very good option for Walmart shopping and traveling. You can apply with a Credit Score of 650+ points, making more people eligible. However, the APR is extremely high, often reaching up to 30%.

 

3. Chase Freedom Flex

Chase Freedom Flex is one of the best options for travelers, as it can rival even travel cards. There’s a generous welcome bonus of $200 and you pay $0 in annual fees. However, the APR is about 16-20% on average, and you should have an outstanding Credit Score of 700+ points to apply for it.

 

4. Ink Business Unlimited® Credit Card

This credit card is one of the most generous, as you earn a $750 bonus as a welcome bonus + 0% APR for the first year. You also don’t have an annual fee but you do have about 17%-20% APR on it. However, one of the main perks is the unlimited 1.5% cash back rewards on all purchases. This is great for businesses, but the Credit Score requirements are also high – 700+ points.

 

5. Amazon Business Prime American Express Card

If you’re constantly using Amazon for your online shopping, this card is the right choice. You can receive up to $100 rewards, there’s no annual fee, and you can earn up to 5% back from Amazon’s orders. You can also swap the 5% for 90-day 0% APR financing, which is the main benefit of the card. Bear in mind you should be an Amazon Prime member with a good Credit Score (700+ points), and the penalty APR is huge.

 

6. U.S. Bank Business Triple Cash Rewards World Elite™ Mastercard®

One of the most generous welcome offers is the one promoted by the U.S. Bank. Up to $500 rewards as a welcome bonus, paired with a 0% annual fee, is a fantastic boost. It also has a promotional 0% APR + 3% cash back on different bonus categories. However, there’s one catch – there is a huge standard APR (it can easily exceed 25%), and there’s a balance transfer fee that can eat up you savings.

 

7. American Express® Business Gold Card

Unlike other cards on the list, the AMEX Business Gold card works with points that you can collect. It is a superb value for money if you’re traveling a lot with up to 20-25% cash back on travel flights. You receive up to 60-70 thousand points and 4 points per dollar for the first $150,000. However, there’s a $295 annual fee which is steep. On top of that, the APR rate is not low, starting from 15% and going well beyond the 20s.

 

8. The Hilton Honors American Express Business Card

If you travel to luxurious destinations or prefer quality for your business trip, this is the right credit card. You get an excellent value for the annual fee of $95, and on top of that, you’ll get more than 100,000 points. There are no foreign transaction fees, which is a great added bonus, and it’s a great option if you are a Hilton hotel fan. However, you should bear in mind this card has no real value if you’re not a Hilton user. On top of that, there is a high APR fee of up to 25%.

 

What Stores Give You Most Money Back?

Of course, when we talk about generous offers from credit card issuers, we need to mention the stores that give the best credit card rewards.

 

1. Kroger

Kroger is quite generous with its offer. You can get up to $120 cash back at the store with Discovery card, and you also have to up to $300 for debit cards. There are some things to consider, though: there is a $0.50 fee for rewards of up to $100 and $1.50 for amounts between $100.01 and $300.

 

2. Whole Foods

Whole Foods is pretty standard in its offering. They include all spending categories but can redeem $100 back which is not a bad amount.

 

3. Walmart

Walmart limits you to $20 up to $100 cash back, and it depends on the bonus category you’ve chosen. However, you cannot redeem more than $20 at once.

 

4. Target

Target lets you cash back up to $40 and just like Walmart, you cannot redeem more than $20 at once.

 

Final Thoughts

If you already have a credit card, you can benefit from a lot of bonus cash via cash back. It’s money that you can use for so many purposes – you can pay less, cover your debts, and even donate.

But in case you don’t have a credit card yet, you should consider the benefits against the disadvantages. If you’re not disciplined enough and cannot take control of your spending, you might end up in massive debt, as APR on credit cards is much higher than standard loans and mortgages.

And if you don’t have a credit card and have no intention to get one, we have to say that there are many options to get a lot of cash back. All you need to do is sign up with a rewards site like Monetha, and you can save as you spend!

If you like this article, check out our blog post about how to earn money from your data!

*Disclaimer: All the information is based on Monetha’s research. We advise you to NOT open any account before consulting with a credit card expert.

Table of Contents

Shop smart

Click or scan to download