Credit cards are a valuable financial tool that can make it easier to afford some of life’s more expensive purchases and show prospective lenders that you’re a trustworthy borrower. One other major perk: credit card rewards.
When you pay with plastic, many card issuers will reward you in the form of miles, points, or cash back. These rewards can often be redeemed for travel, entertainment purchases, gift cards, statement credits, and more.
And, when used strategically, your credit card rewards can help you trim your regular expenses and reduce your credit card balance.
What is cash back and how much can you earn?
Cash back cards allow cardholders to earn a percentage of cash back on every dollar you spend, usually anywhere between 1% and 5%, although some cards may go even higher for specific purchases at qualifying merchants. Cash back rewards typically fall into one of the following categories:
- Flat-rate: This kind of cash back is a set percentage on all of your qualifying purchases.
- Tiered rate: Some cash back cards tend to offer higher cash back rates on certain spending categories.
- Rotating categories: These cash back cards offer rewards for different different categories that rotate monthly or quarterly.
The amount you can expect to earn in cash back rewards will depend on your credit card’s rewards structure and whether or not your card rewards your spending habits. Major credit card issuers like American Express, Capital One, Discover, Citi, Bank of America, and Ally, to name a few, all offer credit cards with unlimited cash back earning opportunities as high as 5% on eligible purchases.
Pro tips for using your cash back wisely
How you use your cash back is ultimately up to you, but experts say it could be an opportunity to hit some of your financial goals.
“When used responsibly, a cash rewards credit card can be a simple way to earn cash back on routine, day-to-day purchases without a second thought,” says Jason Gaughan, Head of Consumer Credit Card Products at Bank of America. “Often, cash rewards cards offer a variety of flexible redemption options, such as putting the rewards into savings or using them to invest, which means you can choose to use the extra cash in whichever way works best for your lifestyle.”
A few smart ways experts suggest you use your cash back:
1. Redeem your cash back for a statement credit
Credit card debt often comes with a higher interest rate than other types of debt, so you want to prioritize eliminating any balance you may have sooner rather than later. Redeem your cash back for a statement credit to decrease your overall balance. Note: this usually doesn't count as a credit card payment, so unless you eliminate your entire debt balance with your cash back, you'll still need to make sure to make your credit card payment when it's due.
2. Use it to offset a large purchase
If you plan to take a vacation soon or purchase a new appliance for your home, you could save your cash back rewards and plan to redeem it around the time of your purchase. “I personally like saving my cash rewards for a big ticket purchase or to put towards a savings goal like our vacation fund,” says Andrea Woroch, financial expert and author. “Although I know it may not be enough to cover our entire trip, I will designate our cash rewards towards maybe a few extras on our vacation that we may not have planned because they were pricey and out of our planned budget such as an expensive restaurant meal or experience.”
3. Redeem your cash back as a check or direct deposit
Some card issuers allow you to receive your cash back in the form of a check or a deposit into your bank account which can significantly expand your options for how you choose to use your cash back. Beware: some issuers may have requirements in place for how much cash back you need to have earned before you qualify for this option. However, if you do qualify, you can use these extra funds to help boost your emergency fund, pay down other debts, or invest for the future.
Cash back credit cards tend to offer more flexibility than other types of rewards cards, but before you make a plan for how you’ll use your cash back, be sure to read the fine print on your credit card agreement to determine if there are any limits in place for how much cash back you can actually earn.
"Make sure you’re cognizant of any expiration dates that may be attached to your rewards, so you don’t miss out. Or, even better, choose a card that doesn't restrict your cash back to an expiration date," says Gaughan.
The takeaway
With the right credit card in hand, you have the opportunity to passively earn rewards by making your regular, everyday purchases. If you have a cash back card, make a plan for how you’ll redeem your rewards to help you check off some of your major financial to-dos.
