How do cashback credit cards work?
Cashback credit cards reward your spending by giving you more money to spend. Use your credit card to pay for stuff, and the credit card kicks some of it back your way to redeem as a statement credit, a check or direct deposit to a bank account; or use it to purchase other types of rewards (like gift cards, merchandise, travel-related discounts, etc.).
How much are we talking? The amount you earn from a cashback credit card is based on a percentage of how much you spend. For example, if a card offers a 2% rewards rate, you’ll earn $2 back for every $100 you spend.
Some important things to know about cashback credit cards:
Cashback cards have different ways of rewarding your spending, including paying a flat rate on all purchases or paying higher cashback rates on certain spending categories (think groceries, gas, travel, entertainment, and so forth). The best — as in most lucrative — cashback card for you is the one that pays out the highest rate on your biggest credit card expenditures, even the embarrassing stuff.
There’s no need to pay an annual fee for a rewards card. There are loads of no-fee cashback cards. Cashback cards that charge an annual fee may offer higher rewards rates or a wider range of redemption options and card perks. But remember: The card only starts paying off after you earn back enough to cover the annual fee.
Sign-up is your opportunity to rake in the big bucks. Competition for a place in your wallet is fierce. Enter the almighty sign-up bonus (aka “welcome bonus”). Many rewards card issuers offer sign-up bonuses in the $100 to $300 range for spending a certain amount on purchases (say, $500 to $2,000) within the first three to six months. Consider that at a 1.5% rewards rate, you’d have to spend $10,000 to earn $150 in cash back — and you can see how it pays off to remain card-monogamous during this honeymoon period.
It’s easy to find a cashback credit card that pays 1% to 1.5% of every purchase you make. That’s also a typical default rewards rate range for purchases that don’t qualify for a card’s higher rewards rate. So, shop around. And when you do …
Don’t be seduced by marketing-speak. You have to math it out. For example, depending on your actual spending habits, a credit card that pays an unlimited 1.5% cash back on every purchase can be more rewarding than a card that pays 5% cash back on a rotating array of spending categories. (We built the cashback calculator above to help you suss out how much you’ll really earn with different cards.)
Caps are a major buzzkill. You find a 5% cashback credit card and think you’ve scored. You have, champ … but only up to a point. Lenders’ generosity only runs so deep — a fact revealed in the fine print, where you’ll find rules that limit how much a card is willing to pay out. We’re talking about monthly, quarterly or annual spending caps on rewards eligibility, plus opt-in requirements and other restrictions.
Cashback credit cards tend to have higher approval standards. Rewards card issuers typically require “good” to “excellent” credit, or a credit score of 670 points or above on the FICO scale, which goes up to 850. However, there are some newer cashback card issuers (like Jasper and Petal) that cater to those with less-established credit, albeit the cards tend to have a few strings attached.
What are the different types of cashback credit cards?
Cashback credit cards come in three flavors — flat-rate, tiered and rotating rewards rate — based on how rewards are granted.
Flat-rate cards offer a single, set cashback rate on all of your purchases, typically between 1% and 2%. This type of no-hassle rewards card is great if your money management style is set-it-and-forget-it. Sometimes flat-rate rewards cards offer temporary bonus rates on certain spending categories or purchases from select merchants. If, you know, you can be bothered.
Tiered-rate cards pay out a higher cashback rewards rate on purchases that fall into particular retail categories, with a base rewards rate that applies to everything else. For example, you might see 3% cashback on gas and groceries or 2% cashback on travel and entertainment, and 1% to 1.5% cashback on all other purchases. A tiered-rate cashback card is ideal if you have a few predictably higher spending categories in your budget, or carry multiple rewards cards to choose between, depending on which is the rewardiest for what you’re buying.
Rotating rewards rate cards offer higher rewards rates on certain spending categories that rotate, typically monthly or quarterly. Purchases that don’t qualify for the bonus rate earn cashback at a lower base rate (e.g., 1% to 1.5%). This type of cashback card really pays off for advanced card players with a deck of rewards cards to draw from and a calendar for tracking what to buy and when.
Bottom line: The best type of rewards credit card is the one that pays the highest rewards rate on your highest-dollar purchases. We’re not trying to be cheeky. It just comes down to simple math and convenience. Which leads us to …
What credit card gives the most cash back?
Truth time: This is going to require some math. The answer depends entirely on your spending patterns. A cashback credit card calculator makes it easy to suss out the most lucrative card for you. Oh hey, looky there! There’s one conveniently provided at the top of this page! Simply enter the amount you put on your credit card each month — even better, tap in the breakdown of what you spend monthly in the seven major spending categories — and behold a list of rewards cards listed in descending order of how much cash back you’ll earn.
Please just tell me which cashback card with no annual fee is best.
Fine. Since you asked nicely.
The highest-paying cashback credit card that charges no annual fee is the Chase Freedom Unlimited card. If you’re an average consumer who puts $1,000 in purchases a month on a credit card, you’ll earn around $270 in cashback per year. (Same with the American Express Blue Cash Preferred Card, but starting in Year Two you’ll be charged a $95 annual fee.)
Before you sign up for one of those cards, consider this: Change the spending inputs even slightly in the calculator, and the answer to “what’s the best cashback credit card?” changes. (See why we’re reluctant to make broad pronouncements about the best credit card?)
Let’s say you spend an average of $500 a month on entertainment-related purchases instead of the $140 a month the Bureau of Labor Statistics reports the average consumer unit with a $1,000 monthly spending budget shells out. Then the Capital One SavorOne Rewards card becomes your top choice among cashback cards that charge no annual fee — paying you back more than $370 a year. That’s $40 more annually than what you’d get from the Chase Freedom Unlimited card and $60 more than Amex’s Blue Cash Preferred.
TL;DR: The best cashback credit card pays the highest rewards rate for the things you spend the most money on. Which is why it pays to put a little bit of work into examining your actual spending patterns to identify the best (for you!) cashback card. (See also: Cashback calculator above.)
How should I choose a rewards credit card?
Know thyself, card shopper. To choose the best rewards credit card, have a rough idea of your spending habits (how much you shell out within popular spending categories), what kinds of rewards you want (cashback, miles, points, perks), your creditworthiness (which will determine your odds of getting approved by a lender), and how much work you want to put into managing your portfolio of cards. Going in, know that a 1% to 1.5% cashback for each $1 spent is table stakes among rewards card issuers.
Other considerations when choosing a rewards card:
Rewards rates: How generous are they? (Remember: 1% cashback is literally the least a rewards card can do.) If there are different reward tiers, do they align with your spending habits so you’re earning the most for your biggest annual expenditures?
Spending caps: “Unlimited” is the key word. A card that does not limit how much you can earn in rewards is ideal. Some cashback cards put caps on rewards eligibility, allowing you to earn a higher cashback rate only up to a certain amount in purchases (monthly, quarterly, or annually) before dialing back to a lower rate, typically 1%-1.5%. Consider whether the restrictions are too stingy for you.
Fees: Any rewards credit card that charges an annual fee had better offer something juicier than the no-fee competition (higher rewards rates, extra perks, a really fly card design). Besides an annual fee, also note any foreign transaction fees if you’re a frequent world traveler or buy your miracle face cream from overseas. Such fees can add as much as 3% to your bill.
Redemption options: Is flexibility important to you or will cashback (literally, getting cash paid back to you) do? A card may award “points,” “miles” or “cashback” on your spending but allow you to convert or redeem your bounty in other ways. Weigh your redemption options to eke out the highest dollar value when you cash in.
Sign-up bonus: At the start of your relationship with a lender you get one shot to snag some extra cash — and the welcome bonus alone can turn a mediocre card into a real catch. Sign-up bonuses on no-fee rewards cards are usually in the $150-$300 range. Take note how much you have to spend (less is more) during what period of time (longer is better) to grab the bait.
0% introductory APR period: Offering a 0% APR on new balance transfers and/or new purchases is another new-cardmember perk you can find. Transferring a balance you’re carrying on another credit card that charges a higher interest rate to one with a lower APR can save you real money in interest. This move will cost you something, though. The balance transfer fee will be in the fine print. (Expect a minimum of 2% of the amount you want to move, or $5 to $10, whichever is higher.) FYI: Lenders only let you transfer up to whatever credit limit they give you for balance transfers, which may be (probably is) less than your total line of credit. They’d rather you spend money — and generate what’s called an interchange fee for them — than have your balance transfer take up the entire free temporary parking space.
Cardholder perks: Things like fraud protection and account alerts come standard with most credit cards these days. With a good rewards card, we like to see higher-level perks like travel and entertainment deals, trip and cell phone insurance, access to roadside assistance, and so on. Or, just tossing out suggestions here, lunch with Ryan Reynolds (even if his ball-and-chain Hugh Jackman insists on tagging along).
Which is best, a flat-rate, tiered-rate or rotating rewards card?
Flat-rate, rotating rewards, tiered rewards, oh my! Which type of cashback card should you choose?
In the realm of cashback credit cards, we can help you narrow down your choices based on your rewards mindset, whether it’s “Just surprise me with some cash back at some point” or “I’m ready to do some doctorate-level mathematics each time I swipe.”
Get a flat-rate, cashback credit card if you want rewards to fall into your lap with the least amount of effort. If rotating rewards categories or tracking complex point systems makes your head spin, a simple flat-rate cashback credit card is a no-brainer alternative. With each swipe of the card you know exactly what you’re earning. (Look for a card that pays 1.5% cashback, at a minimum.)
- Keep in mind: With a flat-rate cashback card you give up the opportunity to earn a higher percentage cashback on purchases, leaving some potential rewards money on the table.
Choose a card with rotating rewards if you have some predictably big purchases on the horizon. Cruise tickets, a home improvement project, or, or, or … kiss rewards FOMO goodbye. The categories in which you can earn rewards at different rates are plentiful. A card with rewards categories that change monthly or quarterly is great for those who can time their spending to get a higher cashback rate when clicking the “buy” button.
- Keep in mind: To make the most from a rotating category cashback card requires being on your toes — knowing when it’s time to plunk down your card to capture the rewardiest rate. Rotating rewards cards also tend to have lower default cashback rates on everything that doesn’t qualify for the category du jour. Just so you know.
Get a tiered-rate rewards card that aligns with stuff that never drops off your shopping list. For example, if your biggest budget line items are consistently gas and groceries, shop around for a card that pays the highest cashback percentage for purchases in those categories. If you want to be extra, look for a cashback card that tacks on additional related perks (how about roadside assistance?).
- Keep in mind: A tiered-rate rewards card may not be the best one to use for all of your purchases. Like rotating rewards cards, the default cashback rate may be lower than what’s offered by a flat-rate cashback card. A popular workaround is the two-card strategy: Carry a tiered or rotating rewards card for purchases that qualify for that card’s higher cashback rate (gas or groceries, say), and use a flat-rate card for everything else.
How do you redeem cashback rewards?
The most common redemption options are to have the cash you’ve earned credited back to your account or transferred into a bank account, via direct transfer or a paper check for you to deposit.
Get a statement credit. The easiest, and usually fastest, way to get your money is to have the card company apply any amount you’ve earned to your account, which reduces any balance you have. Note: You’ll still be required to make any minimum card payment by your due date.
Ask for a direct deposit. Easy-peasy, especially if the bank that issued you the credit card is the same place where you have a bank account. Also easy if you bank elsewhere and your account is already linked because you’ve used it to pay your credit card bill. There may be a minimum redemption requirement (e.g., $20) to receive a direct deposit.
Request a check. The most leisurely route for receiving a redemption is asking your credit card company to cut and mail you a paper check once you’ve earned a minimum amount in rewards (usually $20 to $25).
Other cashback reward redemption options that we’ve seen in our research allow cardholders to:
Donate the money to a worthy cause, or share (or pool) points with other people enrolled in the same rewards program.
Redeem rewards for gift cards via a credit card’s shopping portal. Sometimes credit cards incentivize this by offering a small bonus to keep your money in its ecosystem. The downside: Choices can be limited. Hope you like Omaha Steaks!
Exchange for merchandise. But first, comparison shop. Often the per-point value of what you get when redeeming for some gadget in the rewards portal is less than what you’d get by simply opting for a statement credit — aka, getting actual cash, then turning around and buying the tchotchke.
Convert the amount to points or miles to redeem through the issuer’s rewards program for everything from airline tickets to seat upgrades to discount hotel stays. Here again, do the math to make sure you’re getting a bigger payoff for your points than you’d get if you simply took the cash and ran with it.
Is it worth getting a cashback credit card?
Do you pay for things using a credit card? Do you like money? Could you use some more of it? Assuming you answered all three questions in the affirmative, it’s absolutely worth your while to get a cashback credit card to earn money back on purchases you’re already making.*
We added that asterisk ☝ to spare you from a Dickensian-length run-on sentence with all the vital caveats tacked on the end. But we’re still going to trot them out for review because they’re important.
A cashback credit card is worth getting if …
- You pay off your balance every month, and
- The amount of cash you earn back is higher than the cost of carrying the card.
A cashback credit card is probably not the best choice if …
You regularly carry a balance on your card. Rewards credit cards tend to charge higher interest rates on outstanding balances than non-reward cards. You can do the math in your head: Simply deduct every dollar you pay in interest from the amount you earn in cashback. Cue stabby horror movie soundtrack.
You don’t earn enough in rewards to cover any annual fee. For example, you’d have to spend $5,000 on a card that pays 2% cashback to cover the cost of a $100 annual fee. You’d only start making money using the card after that. p.s. That calculator up above? It tracks a bunch of good credit cards that charge no annual fee. Take it for a spin.
You’re looking for a good balance-transfer deal. Moving a balance to a lower-interest credit card is a good debt-lowering strategy, and many cashback cards offer an introductory 0% APR on balance transfers and new purchases. Pay close attention to how long the low rate lasts (look for a bare minimum of 12 months; 15- to 18-month deals are out there) and the APR after the promotional period. Just know that this is not where most rewards cards are trying to compete, and there are non-rewards cards offering better deals (read: longer payoff periods and lower subsequent APRs).
Having one will tempt you to buy stuff you wouldn’t otherwise just to earn a few pennies or points to add to your rewards piggy bank. We can get behind silly impulse purchases … just not financially unsound ones. (Trust us, we’ve amassed an entire library of flimsy justifications for our own regretful purchases.)
You have a big financing situation (like getting or refinancing a loan) on the horizon. This isn’t a diss on cashback cards. It’s a cautionary note about applying for too many new lines of credit in a short timeframe, which can negatively impact your credit score, albeit temporarily. Going into a high-dollar borrowing situation, you don’t want a few points to derail your quest to qualify for the very best interest rates.
What credit score do I need to be approved for a rewards card?
Some cards tell you upfront that your odds of approval for a particular card require having “fair,” “good” or “excellent” credit. Others list the credit score range (e.g., “recommended FICO score of 740 or above“) or allow you to see if you prequalify for the card before officially running your credit to make the final call.
Capital One’s Credit Level Guidelines show where certain credit behaviors will typically land you on the credit grading scale:
- Excellent credit: I’ve never declared bankruptcy or defaulted on a loan; I haven’t been more than 60 days late on any credit card, medical bill, or loan in the last year; I’ve had a loan or credit card for 3 years or more with a credit limit above $5,000.
- Good credit: I have not declared bankruptcy or defaulted on a loan in the past 5 years. I have a credit card or loan and have not been more than 30 days late on any payment in the last year.
- Fair credit: I’ve defaulted on a loan in the past 5 years OR I have limited credit history. I’ve had my own credit card or other credit for less than 3 years (including students, people new to the U.S., or authorized users on someone else’s credit card).
- Rebuilding credit: I’ve defaulted on a loan more than once. OR I’ve been declined for a credit card in the last 3 months.
If you’re more of a numbers person, here’s how Fair Isaac Corp., the creator of the popular FICO Score, breaks down the ranges on its 300 to 850 credit scoring scale:
Keep in mind that these are merely general guidelines. Additional factors gleaned from your credit history and card application — like your income and outstanding debt obligations — will factor into the card company’s approval process. To see what they’re seeing, pull your credit files from the three major credit reporting bureaus (Equifax, TransUnion and Experian) for free from annualcreditreport.com.
Methodology
Our mission at investor.com is simple: provide thorough and unbiased reviews of financial products and service providers. But, boy, do we have opinions. And those opinions are based on unparalleled research and reams of data.
We spent eight months gathering 58 data points on each rewards card program in our ever-expanding database to power the investor.com Best Cashback Credit Cards search tool. The results are based on the monthly spending amounts you enter and our calculations for the annual dollar value of the rewards each credit card program pays per $1 spent.
That’s the TL;DR of it. Read on for more about the behind-the-scene machinations that power our Best Cashback Credit Card recommendations.
Drop us a line: We regularly add new cards to our database. Let us know if there’s a credit card rewards program you’d like to see included by emailing us.
About the results
Our database includes rewards credit card programs offered by banks (big and small), credit unions and fintech companies. The results include cashback cards that charge no annual fee, waive the annual fee under certain conditions, or are free to existing customers (such as the Costco card).
Note that credit cards are listed in descending order of how much money each program would pay out in cashback rewards. The results are based on your calculator inputs. None of the issuers pay for preferential placement in the results list.
Credit card companies often express rewards payouts as a percentage (such as 1.5% of every dollar spent) or on a points basis (like 1.5 points for every dollar spent). We converted these to a dollar amount to make it easier to compare programs. Of course, actual rewards payouts will depend on account activity.
To calculate the amount of cash back you could earn per year, we factored in:
- Spend category inputs: The default dollar values for each spend category in the Best Cashback Credit Cards tool — gas, groceries, travel, restaurant, entertainment, pharmacy, other — are based on average American spending data from the Consumer Expenditure Surveys from the U.S. Bureau of Labor Statistics. We encourage you to customize the monthly spend inputs for the most accurate results.
- Tiered rewards rates: If a rewards credit card pays higher cashback rates on certain spending categories, that difference is reflected in the total “Cash Back Per Year” tally.
Some cards have rewards spending caps wherein purchases that exceed a certain dollar amount are subject to a lower default rewards rate, usually 1% or 1.5%. We point out in the individual credit card reviews any monthly, quarterly or annual spending caps that may affect the amount in rewards you can earn. (An upcoming version of this calculator will automatically factor this into the results.)
What’s not included in the “Cash Back Per Year” total is the cash value of any sign-up/introductory bonus. We highlight any Welcome Bonus separately. While sign-up bonuses can be the most lucrative part of getting a new cashback rewards credit card, not everyone will want or be able to do what it takes to earn the extra cash; it usually requires spending a certain amount in a specified time period after the card is activated.
Other data points we collect on each rewards card include fees (annual, balance transfer, cash advance, late/returned payment, foreign transactions), reward redemption options, introductory APRs for purchases and/or balance transfers, perks, quirks, and our own take on the merits of each card.
Expand the results for more information to help you pick the best cashback credit card for your needs.
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About the Editorial Team
Dayana Yochim
Dayana Yochim has been writing (articles, books, podcasts, stirring speeches) about personal finance and investing for more than two decades, focusing on bringing clarity and the occasional comedic aside to what is often a murky, humorless topic. She’s written for NerdWallet, The Motley Fool, HerMoney.com, Woman’s Day, Forbes, Newsweek and others, and been a guest expert on "Today," "Good Morning America," CNN, NPR and wherever they’ll hand her a mic.
Carolyn Kimball
Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money
Andrea Coombes
Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, "Marketplace," and more. She's been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn't necessarily the best financial decision; her dog and two cats would argue this point.
