Credit Cards

4 Things to Know About Cash Back Credit Cards

The idea is elementary enough: If a credit card earns users cash back, it simply returns a certain percentage of their purchases back to the consumer - just like a rebate.

That basic formula makes cash back credit cards the easiest to understand of the three main types of rewards credit cards, and the type that delivers the most flexible of perks--since nothing is more universal than cash. With rewards cards that instead earn points that can be redeemed for different prizes and services, the purchases for which you can use your points is limited, and decided upon by each card's issuer. The third type of rewards card, airline cards, allow you to earn miles earned through a credit card, and those are generally tied to a specific airline's frequent flyer program.

However, the seeming simplicity of cash back cards doesn’t mean they’re all alike or lack nuances. Here are some of their characteristics you should know about. Being aware of these will help you get the most from your cash back cards, or to consider alternatives to them.

No fees, but also modest sign-up bonuses. The rudimentary nature of cash back cards is also reflected in their absence of annual fees. That makes these cards ideal for low spenders, who needn’t meet a certain annual spending amount in order to recoup the fee and begin to truly benefit from the card’s rewards.

Yet card issuers are also less willing to spend big to induce you to sign up for cash back cards. Where the other card types may dangle upfront bonuses with values as high as $800, the welcome bonuses typically run no higher than $100 or so.

Some cash back rewards are based around points. A number of cards advertised as “cash back” are in fact point cards whose main method of redemption is cash back. Instead of your purchases being automatically credited with the standard cash back rebate, these types of cash back rewards accumulate points on your account. It is up to you to then exchange your points to get actual cash. Figuring out whether a credit card gives you pure cash back or points is not always an easy task; you often must read through the "Terms & Conditions" or offer details. The portion of that fine print that discusses rewards is usually below the listing of fees and finance charges; look for a section entitled “Rewards Rules” or something similar.

You don’t actually receive cash. It may seem obvious, but some who sign on for a cash back card may expect to receive a monthly check that reflects how much they’ve earned on the card. Instead, cash back is usually awarded as a credit applied to your credit card statement. For example, if during the course of a month, you made $100 in purchases, with a 2% back credit card you would have $2 in statement credit. Although they are rare, some credit cards allow you to deposit your cash back earnings into a savings or checking account with the same bank, which offers a simple and fairly painless way to contribute, albeit modestly, to a savings plan.

The initial rewards don’t arrive instantly. With most cash back credit cards, you'll wait one to two billing cycles after you begin using the card before rewards are applied. Banks do this because they want to verify your account is in good standing, and that you are not delinquent in payments. Additionally, your credit card company could very well not credit you with any cash back rewards until the total for these hits a certain minimum threshold, such as $25. Again, you can consult the card's fine print to confirm when you indeed receive your rewards.

Robert Harrow

Robert is the head of the Credit Card vertical at ValuePenguin and has been covering the card industry since 2014. His work has been featured in Reuters, Marketwatch, the New York Times and more.