Can You Do Cashback on a Credit Card?

The term “cashback” in credit card use has two distinct meanings. It can refer to a rewards program where you earn a percentage of your spending back, or it can describe obtaining physical cash from your credit line. Understanding these interpretations is important for managing your finances and making informed decisions.

Earning and Redeeming Credit Card Rewards

Cashback most commonly refers to reward programs where cardholders earn a percentage of eligible purchases back. For instance, a card might offer 1.5% to 2% cashback on all purchases, or 3% to 5% on specific categories like groceries, gas, or dining. These rewards accrue over time as you make purchases.

Once accumulated, cashback rewards can be redeemed in several ways.

• Receiving a direct deposit into a linked bank account.
• Applying rewards as a statement credit to reduce your credit card balance.
• Obtaining gift cards.
• Redeeming for online shopping.
• Making charitable donations.

These redemptions are a return of past spending and do not incur additional interest or fees.

Cash Advances: An Alternative for Getting Cash

Cashback can also refer to a cash advance, a direct way to obtain physical money using your credit card. A cash advance is a short-term loan drawn against your credit card’s available credit limit. This differs from withdrawing funds from your bank account, as the money comes from your credit line, not your own deposits.

You can obtain a cash advance at an ATM using your card and PIN, over the counter at a bank, or through convenience checks. Unlike regular purchases, cash advances come with immediate fees and higher interest rates. A common fee is 3% to 5% of the advanced amount, or a minimum flat fee, such as $10, whichever is greater. Interest often begins accruing immediately from the transaction date, without the grace period typically offered for purchases. Annual percentage rates (APRs) can range from 25% to 30% or higher.

Key Differences and Considerations

The distinction between cashback rewards and cash advances is significant due to their financial implications. Cashback rewards are a benefit earned on spending, effectively a discount on purchases, and do not involve borrowing money or incurring additional interest or fees. Conversely, a cash advance is a form of borrowing that immediately adds to your credit card balance, incurring upfront transaction fees and higher interest rates that begin accruing instantly.

A cash advance impacts your credit utilization ratio, which is the amount of credit you are using compared to your total available credit. A large cash advance can increase this ratio, potentially causing a temporary dip in your credit score, especially if it pushes your utilization above recommended thresholds like 30%. Paying off a cash advance quickly can help your score recover, but immediate interest accrual and fees make them a costly option. In contrast, redeeming cashback rewards does not negatively affect your credit utilization or score and serves as a financial benefit from your existing spending habits.