What Is Cashback on a Credit Card and How Does it Work?
A cashback or cash rewards credit card gives you back a percentage of the money you spend using the card. The cash reward is usually a percentage of the amount you spend. For example, if a card offers 1% cashback, spending $4,500 over the course of a year would give you a reward of $45. Every card comes with choices and trade-offs, but the right one can help you make the most of your everyday purchases.
How Does a Cash Rewards Credit Card Work?
A cash rewards credit card is a payment card that returns a percentage of what you spend directly to you as cash. When you use the card to buy eligible items, you earn a small percentage of that amount. You can track your cash rewards in your card’s online account.
You can redeem the cash rewards as:
- A statement credit (an adjustment that lowers your credit card bill)
- Deposited funds into your bank account
Types of Cash Reward Cards
Cashback credit cards let you earn rewards in different ways. There are three main types:
- Flat-rate rewards: Earn the same cashback rate on every eligible purchase, no matter where you shop. These are commonly used for everyday spending.
- Tiered rewards: Earn cashback rates that vary based on factors like spending levels or your relationship with the bank. These might be a good fit if you spend more overall or already have a strong relationship with your bank.
- Category rewards: Earn higher cashback rates in specific spending categories, like groceries or gas, and a lower rate on other purchases. These could be helpful if you spend more in certain categories.
Some cards also come with limited-time perks for new and existing cardholders:
- Sign-up bonuses: Receive a one-time cash reward when you meet a spending requirement within a set time after opening the account.
- Promotional rewards: Earn increased reward rates or statement credits on select purchases or at specific stores for a limited time.
Reward limits, reward rates and program rules vary by card, so review the terms before applying.
What Are the Benefits of a Cash Rewards Credit Card?
Cashback credit cards can help cardholders earn rewards on eligible purchases while also providing many of the same benefits found on other credit cards. These may include:
- Rewards on everyday purchases: Eligible spending on things like groceries, gas and recurring bills could turn into cashback.
- Fraud protection: Credit card issuers often offer protection against certain unauthorized transactions and billing errors.
- Building credit: Using a credit card responsibly and making payments on time could help you build a positive credit history.
What are the drawbacks of a cashback credit card?
Cash rewards credit cards can provide value, but there are a few considerations to keep in mind:
- Interest charges: Carrying a balance from month to month may cost more in interest than you earn in rewards.
- Fees: Annual fees, late payment fees and other charges could reduce the overall value of the rewards you earn.
- Overspending risk: The opportunity to earn rewards may encourage some cardholders to spend more than planned.
- Rewards restrictions: Rewards rates, redemption values, expiration rules or other program features may change over time, which could affect how much you earn or how you use your rewards.
How Do I Earn Cashback?
You can earn cashback from eligible purchases made with a cash rewards credit card. Here's how it works:
- Make eligible purchases with your card.
- Accumulate cash rewards based on the card's rewards rate (the percentage of each purchase returned to you).
- Watch your rewards add up automatically as you keep using your card.
Some account terms may affect how much cashback you earn:
- Good standing: Some card issuers may withhold or take back rewards if your account is past due, over its limit, closed or otherwise not in good standing.
- Spending caps: Some bonus categories limit how much spending earns the higher rewards rate. Purchases above that limit may earn a lower rate or no bonus cashback.
Certain transactions, like balance transfers, cash advances, ATM withdrawals, person-to-person transfers and convenience checks, typically don't qualify for rewards. Returning a purchased item may also reduce your available rewards balance. Rewards rates, redemption options and program rules vary by card issuer.
How Do I Redeem Cash Rewards?
Depending on your card’s program, you can often redeem rewards:
- Online
- On a mobile app
- By phone
Some cards require a minimum rewards balance before you can redeem. Check your card's rewards program details for information about redemption requirements, timing and options.
Do cashback credit card rewards expire?
That depends on the card and issuer. Some rewards programs have expiration dates or rules that can cause you to lose unused rewards. For example, rewards may expire after a period of inactivity or be forfeited if you close your account.
If you're unsure about your card's rules, review the rewards program terms or contact the card issuer. These details typically explain when rewards expire, what activities may affect your rewards balance, and any requirements for keeping rewards active.
Are credit card cashback rewards taxable?
In most cases, cashback rewards earned through credit card purchases aren't considered taxable income. They're generally viewed as a rebate on what you spent.
But, some rewards, like certain sign-up bonuses that aren't tied to spending, may be treated differently for tax purposes. Tax rules can vary based on your individual circumstances.
If you have questions about how rewards may affect your taxes, review the card’s program terms or consult a qualified tax professional.
Does KeyBank Have a Cash Rewards Credit Card?
Yes, our Key Cashback® credit card provides several ways to earn value from eligible purchases. The card offers up to 2% cashback1 and no annual fee2.
Want help choosing the right card? Talk through your goals, spending and credit options with an experienced banker by visiting a branch or scheduling a Key Financial Wellness Review®.