What cash back on a credit card actually is
Cash back is money the credit card company gives you back as a reward for spending. When you use the card to buy something, the merchant pays the card company a fee (usually 2 to 3 percent of the purchase). The card company keeps most of that fee, but some cards return a portion of it to you. That return is cash back.
The amount you get back is a percentage of what you spent. A card offering 1 percent cash back returns $1 for every $100 you charge. A card offering 2 percent returns $2 per $100. Some cards offer higher rates on specific categories—groceries, gas, restaurants—and a lower flat rate on everything else.
Cash back is not a discount on your purchase price. It is a separate payment from the card company to you, usually credited to your account once a month or once a quarter. You still pay the full purchase price to the merchant.
Key Takeaways
- Cash back is a percentage of your spending that the card company returns to you, typically ranging from 1 to 5 percent depending on the card and category.
- You receive cash back only on purchases you actually make—there is no cash back on balance transfers, cash advances, or fees.
- Cash back is usually credited to your account automatically each month or quarter, and you can use it to reduce your balance, get a statement credit, or request a check.
- You must pay your bill on time to keep earning cash back, because most cards suspend rewards if your account goes to collections.
- Cash back has no tax consequences for you because it is treated as a rebate, not income.
What purchases actually earn cash back
Cash back applies to purchases you make with the card at merchants who accept it. This includes online purchases, in-store purchases, and recurring bills you charge to the card. The card company tracks every transaction and calculates the cash back owed to you based on the card's rewards structure.
Cash back does not apply to cash advances, balance transfers, or fees. If you use the card to withdraw cash from an ATM, you get no cash back and you pay a fee instead. If you transfer a balance from another card, that transfer earns no cash back. Annual fees, late fees, and foreign transaction fees earn nothing.
Some cards exclude certain merchants or purchase types. A card might offer 5 percent cash back on groceries but only up to $1,500 per quarter, then 1 percent after that. Another might exclude gas station purchases or offer no cash back on gambling or lottery tickets. Read the card's terms to see what is and is not covered.
How cash back gets credited to your account
Cash back accumulates as you spend and is usually credited automatically once a month or once a quarter. The card company calculates your total cash back for the period, then adds it to your account. You will see it listed on your statement as a credit or a reward deposit.
Once the cash back is credited, you have several options for how to use it. You can let it sit as a credit on your account, which reduces the amount you owe. You can request a statement credit, which the card company applies directly to your bill. You can ask for a check mailed to you. Some cards let you transfer cash back to a linked bank account, redeem it for gift cards, or use it to pay down your balance.
The exact process depends on your card issuer. Check your card's website or app to see what options are available. Most let you choose how to use your cash back each time it is credited, so you do not have to decide in advance.
When you stop earning cash back
You earn cash back only while your account is in good standing. If you miss a payment and your account goes to collections, the card company will stop crediting new cash back. Some cards also suspend rewards if you carry a balance past a certain point, though this is less common.
If you close the card, you keep any cash back that has already been credited to your account. Cash back that has not yet been credited—for example, rewards earned in the current month that have not posted yet—may be forfeited when you close the card. Check your card's policy before closing an account.
If you dispute a transaction and the card company reverses it, the cash back earned on that transaction is also reversed. The cash back is tied to the purchase, so if the purchase is undone, the reward goes away too.
Cash back versus other rewards
Cash back is one type of credit card reward. Other cards offer points or miles instead. The difference is what you can do with them.
Cash back is the most flexible because you can use it however you want—reduce your balance, get a check, or apply it to your next statement. Points and miles are usually locked into specific redemptions: you might redeem points for gift cards at particular stores, or miles for airline tickets. If you do not travel or shop at those specific places, the points are harder to use.
Some people prefer points or miles because the redemption value can be higher if you use them strategically. A point might be worth 1 cent when you redeem it for a gift card, but 2 cents when you redeem it for a flight. Cash back is always worth exactly what it says: 1 percent cash back is always 1 percent of your spending, no matter how you use it.
Whether cash back actually saves you money
Cash back saves you money only if you would have made the same purchases anyway. If you spend $10,000 a year on a card offering 2 percent cash back, you get $200 back. That is a real reduction in what you owe.
Cash back does not save you money if it causes you to spend more than you would have otherwise. If you charge purchases to the card just to earn cash back, or if you carry a balance and pay interest, the interest charges will exceed the cash back. A 2 percent cash back reward disappears if you pay 15 percent interest on a carried balance.
Cash back also does not offset an annual fee unless the cash back exceeds the fee. A card with a $95 annual fee and 2 percent cash back needs you to spend $4,750 per year just to break even. If you spend less than that, you lose money by holding the card.
How cash back is taxed
Cash back is not taxed as income. The IRS treats it as a rebate on your purchase, not as income you earned. You do not report it on your tax return, and the card company does not send you a 1099 form for it.
This is different from a sign-up bonus, which some cards offer as an incentive to open an account. Sign-up bonuses are sometimes taxable depending on the amount and how the IRS views them, though most are not. Cash back earned through regular spending is never taxable.
Frequently Asked Questions
Can I get cash back if I pay off my balance in full each month?
Yes. Cash back is earned on the purchase itself, not on how you pay the bill. Whether you pay in full, make a minimum payment, or carry a balance, you earn the same cash back on that purchase. Paying in full just means you avoid interest charges.
What happens to my cash back if I don't use it?
Cash back that has been credited to your account stays there indefinitely. It reduces your balance and earns no interest. Some cards expire cash back if you do not redeem it within a certain period, but most do not. Check your card's terms to see if there is an expiration date.
Can I get cash back on a purchase I returned?
No. When you return an item, the merchant refunds the charge, and the card company reverses the cash back that was earned on that purchase. The cash back is tied to the transaction, so if the transaction is undone, the reward is undone too.
Do I earn cash back on fees I pay to the card company?
No. Annual fees, late fees, foreign transaction fees, and cash advance fees earn no cash back. Only purchases at merchants earn rewards. Some cards waive the annual fee for the first year or offer other incentives, but fees themselves never generate cash back.
What if my card issuer goes out of business?
Cash back that has already been credited to your account is treated as a credit balance on your account. If the card issuer fails, that balance is typically protected under deposit insurance rules, though the specifics depend on the bank and the situation. Cash back that has not yet been credited may be lost.