Can You Get Cash Back From a Credit Card?

Credit cards offer two distinct ways to access or earn “cash,” each with different financial implications. Understanding these differences is crucial for effective money management.

Understanding Credit Card Cash Advances

A cash advance is a loan obtained from your credit card’s available credit limit. It provides immediate access to physical cash. You can get a cash advance through ATM withdrawals using your PIN, in-person transactions at a bank or credit union, or by cashing convenience checks from your card issuer.

Cash advances are expensive. Unlike standard purchases that often have a grace period, interest on a cash advance begins accumulating immediately from the transaction date. The Annual Percentage Rate (APR) for cash advances is also typically higher than the APR for purchases. In addition to interest, cash advances incur a fee, commonly ranging from 3% to 5% of the advanced amount, or a flat fee of around $10, whichever is greater.

For example, a $500 cash advance with a 5% fee would immediately charge $25, with interest accruing on the full $525. Credit card issuers often set a separate, lower limit for cash advances, which is usually a percentage of your overall credit limit. These transactions are treated as separate balances on your statement, and if you only make minimum payments, your payment may be applied to lower-interest purchase balances first, allowing the high-interest cash advance balance to grow.

Understanding Credit Card Cash Back Rewards

Cash back rewards function as a reward program, not a loan. When using a cash back credit card for eligible purchases, you earn a percentage of your spending back. This percentage can be a flat rate across all purchases, or it can vary, with higher percentages offered in specific bonus categories like groceries, gas, or dining, which may sometimes rotate quarterly.

Rewards accumulate in your account and can be redeemed in various ways. Common options include a statement credit to reduce your balance, or a direct deposit into a linked bank account. Other options include gift cards to various retailers, merchandise, or direct use for online shopping at participating merchants.

Cash back rewards are a discount or rebate on purchases, not borrowed money. The cash back is typically issued after the statement period concludes. This system provides a tangible benefit for spending you would likely do anyway, effectively giving you a small percentage of your money back.

Important Considerations for Credit Card Cash

The fundamental distinction between a cash advance and cash back rewards lies in their nature: a cash advance is a loan, while cash back is a reward. This difference has significant financial implications. A cash advance immediately increases your outstanding balance, which can elevate your credit utilization ratio—the amount of credit used compared to your total available credit. A high credit utilization ratio, typically above 30%, can negatively impact your credit score, as it is a significant factor in credit scoring models. While a single cash advance may not directly damage your score, the resulting higher balance and immediate interest accrual can make it harder to pay off, potentially leading to a sustained high utilization and a negative effect on your credit profile.

Conversely, cash back rewards generally do not have tax implications for consumers. The Internal Revenue Service (IRS) typically views these rewards as a rebate or a reduction in the price of purchased goods or services, rather than taxable income. This applies to cash back earned from purchases and often to introductory bonuses that require a certain spending threshold. However, if a bonus is received without any spending requirement, such as for opening an account, it may be considered taxable income. For businesses, cash back rewards might require an adjustment to the deductible cost of purchased items. Understanding these distinctions is crucial for managing your financial resources effectively and making informed decisions about credit card use.