How Does a Cash Back Credit Card Work?

Cash back credit cards are one of the most popular reward cards. They offer the ability to earn cash back on purchases and give you a choice to redeem your earnings in a variety of ways. Read more about cash back credit cards below!

Understanding Cash Back Rewards

You probably already know that cash back credit cards are a good choice for people who pay off their balances each month. But did you know they might not be the best option if you’re planning to carry a balance?

That’s because most cash back cards have interest rates ranging from 10-20%. So if you don’t pay off your balance in full each month, then the interest can quickly negate any rewards earned.

How Does it Work?

When you use a cash back credit card, you get a percentage of your purchase returned to you as a statement credit or check. This differs from rewards points, usually redeemed for gift cards and other items. These cards are popular with people who spend big on their credit cards each month and want the flexibility to earn money back on everything they buy.

Each purchase varies from card to card, but it’s typically between 1% and 2%. So, for example, if you spend $500 using your cashback card at the grocery store, then $10-$20 might automatically be added to your account within about two weeks. You can choose to redeem this money at any time through your online account or by calling customer service.

“Earn up to 3% cash back toward your financial goals when you apply and get approved for a credit card, and set up direct deposit through SoFi.” says advisors at leading financial services.

Types of Credit Card Cash Back Programs

There are two main types of credit card cash back programs:

  • Cash back rewards. The most common type is a straight-up cashback program, where you get a percentage of your purchases paid out through statement credits or direct deposits into your bank account. These rewards can be paid out once or twice yearly (or more frequently for some issuers). You can also sometimes use your cash back reward toward other purchases if you have an account that lets you do so.
  • Statement credit. This type works differently than just earning straight-up cash back. Instead, it’s primarily used to get discounts on travel expenses and hotel stays. This doesn’t mean there aren’t any ways to actually receive money from these cards—it just means that those methods are limited compared with conventional cash back programs.

How are these credit cards funded?

Cash back credit cards are funded in a variety of ways. The most common ways that cashback is funded include:

  • Being deposited into your account, like a typical bank account (this is called deposit-based funding)
  • Being applied to your statement, just like any other purchase would be paid for (this is called statement-based funding)
  • Given as a statement credit and applied at the end of the billing cycle.

The best way to use cash back credit cards is to ensure you understand how they work and how much money they can save you. Cash back credit cards offer an easy way to earn rewards, but it’s important not to spend more than what you have in your checking account. With proper planning and financial discipline, anyone can get the most out of their cash back card rewards!

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