What is a cash back credit card? How is it different from other cards?

Last Updated: April 4, 2020   MoneyHacker

The world of credit cards can feel byzantine and opaque. That’s not your fault; it’s by design. Fooling credit customers into accepting unnecessarily complicated terms is a feature, not a bug.

However, doing basic research can give you a big leg up on making the best credit decisions to avoid high-interest pitfalls and cash in on rewards. Here at Money Hacker, we’ve done some of the work for you to make your life easier.

So what is a Cash Back credit card? Cash Back cards:

  • Cash Back Credit Cards incentivize spending by rewarding customers with cash.
  • This percentage is usually small but differs from card to card. You can expect 1% cash back on many cards.
  • However, some cards (especially those that require annual fees to use) might offer you more than 1% back.
  • Another common system is for cards to give you 1% cash back for any purchase, but higher points on certain kinds of purchases. These categories for higher rewards are either predetermined, change on a rolling basis, or give customers some control over where they’ll be rewarded.
  • Customers might choose certain categories to be further rewarded by picking a specific card that rewards particular spending, picking from preselected, changing options, among other methods for choosing where they receive inordinate rewards.
  • One important thing to note is that cash back earnings are tax-free. They’re considered rebates and aren’t part of gross income.

How do Cash Back credit cards work?

  • Let’s compare two specific credit cards to illustrate how cash back actually works. Take, for example, the Chase Freedom class of credit cards.
  • There’s the Chase Freedom card, which gives users 5% cash back on up to $1,500 on purchases in categories that rotate quarterly. It also gives customers 1% cash back on any purchases that fall outside of these parameters. So for example, you might get 5% back on gas station purchases, or grocery stores, or through PayPal.
  • Keep in mind that you have to activate these bonuses each quarter, choosing from within the bonus categories offered to you. So what if you don’t use PayPal for purchases, and the other options aren’t appealing either? You might opt for a different card.
  • Take, for example, the Chase Freedom Unlimited, which gives you a flat 1.5% back on all purchases. Here you don’t have to make as many choices or do maintenance on the card. However, if your grocery bill is your highest expense, a card that caters to that might be a better option for you.

How is this different than other kinds of credit cards?

  • For one, cash back credit cards generally require a credit score of at least 700 (out of 850). Other credit cards might be less stringent about who they extend credit to.
  • Some cards offer rewards, but they aren’t cash back rewards. They might offer points that can be redeemed for different things (cash, or more if used towards travel, among other options).
  • These reward cards have a system in which customers get a percentage of what they spend back from a credit card company, but it’s not direct cash.
  • You can often get more from each dollar spent with cards that let you redeem miles or points than strictly cash back cards. Cards like these will often give you an option to get cash back, but dangle larger rewards if you use your points on specific types of spending.
  • There are credit cards that offer you no rewards whatsoever, sometimes referred to as “plain-vanilla” cards.
  • Balance Transfer credit cards let you transfer existing high-interest debt onto a card with a much lower interest rate, or even one with no interest for a promotional period.
  • There are Student credit cards, specifically designed for young people with little to no credit history.
  • Charge cards don’t have a preset spending limit. Balances need to be paid entirely at the end of each credit period (usually a month). Late payments are penalized.
  • Secured credit cards are for people with no credit history or poor credit scores. They require a security deposit and are generally limited to spend as much as the deposit.
  • Subprime credit cards are to be avoided at all costs. They prey on people with bad credit history and exploit their need for credit with high-interest rates and hidden fees. It’s not hard to get approved, but the terms are purposely hard to understand. Despite some government intervention to deter this model of card, they’ve still found ways to stay on the market.
  • Prepaid credit cards require you to load money that you spend, and are more comparable to debit cards, except they aren’t tied to a bank account. They aren’t actually credit cards, and won’t help rebuild credit scores.
  • Limited purpose credit cards are only good at pre-picked locations, like specific stores or gas chains.
  • Business credit cards were created for business owners and their workers to use. They keep business, and personal purchases separate (in theory).

This is a good cross-section of the cards that exist on the market today. They all have their pros and cons. Remember, the terms of different cards are often full of land-mines that look to trap and exploit credulous customers. One way you can protect yourself from usurious charges and interest rates.

Interested in seeing more techniques on how to utilize cash back credit cards to your utmost advantage? Check out our guide on 15 ways to save money with cash back cards.