Can I Get Cash Back With My Credit Card?

Using a credit card can offer “cash back,” a term that refers to two distinct financial concepts. Understanding these differences is important for effective financial management. This article clarifies what “cash back” means for credit cards, detailing how each method works and its financial implications.

Understanding Credit Card Cash Back Rewards

Credit card cash back rewards are an incentive program where cardholders earn a percentage of their spending back, typically as a credit or direct payment. These rewards accrue when you make eligible purchases with your credit card, and the amount earned depends on the card’s specific rewards structure.

There are three main types of cash back programs. Flat-rate cards offer the same percentage back on all purchases, providing a straightforward way to earn rewards. Tiered or bonus-category cards provide higher percentages in specific spending categories, such as groceries, gas, or dining, while offering a lower base rate on all other purchases. Some cards feature rotating bonus categories that change periodically, often quarterly, requiring activation to earn the higher reward rate.

Rewards are earned as a percentage of the transaction amount; for example, a 1.5% cash back rate on a $100 purchase yields $1.50 in rewards. However, transactions like cash advances, balance transfers, or certain cash-like transactions do not qualify for rewards. Card issuers track these rewards in your account, accumulating them over time.

Redeeming cash back rewards offers flexibility, with several common options. You can apply rewards as a statement credit to reduce your outstanding balance. Issuers also allow direct deposits into a linked checking or savings account, or they may send a check by mail. Other redemption possibilities include gift cards, merchandise through the issuer’s portal, or using rewards for online shopping. Some programs may have minimum redemption amounts or specific expiration policies, so reviewing your card’s terms is advisable.

Obtaining Cash Through Credit Card Advances

A cash advance is a short-term loan obtained from your credit card’s available credit limit, providing immediate access to physical cash. Unlike a regular purchase, a cash advance means borrowing money directly from your credit line. This option is used when cash is the only accepted form of payment.

Cash advances can be accessed through several methods:
ATM withdrawals using your credit card and PIN.
Requests from a teller at a bank or credit union branch, requiring your credit card and a government-issued photo ID.
Convenience checks linked to your account, which can be cashed or deposited.
Online transfers from your credit card to your bank account.

Cash advances come with significant costs, making them an expensive way to borrow money. A transaction fee is almost always charged, typically ranging from 3% to 5% of the advance amount, often with a minimum fee of around $10. The Annual Percentage Rate (APR) for cash advances is usually higher than the APR for standard purchases, often ranging from 24.99% to 29.99% variable. Interest on cash advances begins to accrue immediately from the transaction date, as there is no grace period like there often is for purchases.

Taking a cash advance can affect your credit health. The advance increases your credit card balance, which raises your credit utilization ratio—the amount of revolving credit you are using compared to your total available credit. A high utilization ratio, generally above 30%, can negatively impact your credit score. While a cash advance itself doesn’t directly appear on your credit report as a separate loan, the increased balance it creates can have indirect effects. Prompt repayment is important to mitigate potential negative impacts on your credit score.

Tax Treatment of Credit Card Cash Back

The tax treatment of credit card cash back depends on whether it originates from a rewards program or a cash advance. For cash back rewards earned through credit card purchases, the Internal Revenue Service (IRS) generally does not consider these as taxable income. These rewards are viewed as a discount or rebate on the purchases you made, effectively reducing the net cost of the items. This applies whether the rewards are received as statement credits, direct deposits, or gift cards.

However, there are limited exceptions where rewards might be considered taxable. For instance, if a reward or bonus is given simply for opening an account without requiring any spending, it could be seen as taxable income. If you earn $600 or more in such non-purchase-related rewards, the issuer might send you a Form 1099-MISC.

Conversely, a credit card cash advance is treated as a loan, not income. Therefore, the principal amount of the cash advance itself is not taxable. However, the interest charged on a personal cash advance is generally not tax-deductible. While interest on credit cards used for business expenses can sometimes be deductible, cash advances often incur fees rather than traditional interest, and those fees for personal use are also not deductible.