How Does Cashback Work on Credit Cards?
Understand the complete process of credit card cashback, from how you earn rewards to various redemption options and important program details.
Cashback programs on credit cards offer a popular reward system, allowing cardholders to receive a percentage of their spending back. This provides financial returns on eligible purchases. Understanding how this system operates, from earning to redemption, helps consumers maximize value from their spending. This article clarifies the process, covering earning structures, redemption methods, and important considerations.
Understanding How Cashback is Earned
Cashback is calculated as a percentage of eligible purchases made with a credit card. The method varies across different credit card programs. Many cards offer a flat-rate cashback, providing a consistent percentage, often between 1.5% and 2%, on all purchases regardless of the spending category. This means every dollar spent contributes equally to the cashback balance.
Other credit cards utilize a tiered cashback structure, where different spending categories yield varying percentages of rewards. For instance, a card might offer a higher rate, such as 3% or 4%, on purchases at grocery stores, gas stations, or dining establishments, while offering 1% on all other purchases. These categories are usually fixed. Cashback accrues as a balance within the cardholder’s account.
A third common earning structure involves bonus or rotating categories, which offer significantly higher cashback rates for a limited time, typically quarterly. These categories, which often include popular spending areas like Amazon.com, gas stations, or restaurants, can yield 5% cashback on eligible purchases. Cardholders need to activate these bonus categories each quarter to earn the elevated rate. After a specified spending cap for the bonus category, the earning rate typically reverts to a standard 1%.
Methods for Redeeming Cashback
Once cashback is accumulated, cardholders have several options for converting rewards into tangible value.
Statement Credit: The cashback amount is applied directly to the credit card balance, reducing the amount owed.
Direct Deposit: Card issuers permit transferring earned cashback to a linked bank account.
Check: The card issuer mails a check for the accumulated cashback amount.
Gift Cards: Some programs offer exchanging cashback for gift cards from various retailers.
Merchandise or Travel: Some programs may allow using cashback for merchandise or travel bookings through the issuer’s online portal.
Many credit card programs have a minimum redemption threshold, commonly around $25, that must be met before cashback can be redeemed. Some issuers, such as Capital One and Discover, have no minimum redemption requirement. Redemption can be initiated through the credit card issuer’s online account portal or mobile application.
Important Considerations for Cashback
Several important factors influence the overall value and management of cashback rewards.
Expiration and Forfeiture
Cashback rewards generally do not expire as long as the account remains open and in good standing. However, rewards may be forfeited if the account is closed by the cardholder or the issuer, or if there is prolonged inactivity.
Earning Caps
Many cashback programs, particularly those with bonus or rotating categories, impose earning caps on the amount of cashback that can be earned at the higher rate. A common cap for 5% bonus categories is $1,500 in spending per quarter, after which the earning rate typically drops to 1% for that category. These limits are usually applied quarterly or annually.
Tax Implications
Cashback earned from credit card spending is generally considered a discount on purchases rather than taxable income. The Internal Revenue Service (IRS) views these rewards as a rebate, reducing the cost of goods or services. Therefore, cashback accumulated through everyday spending is not subject to income tax.
Tracking Rewards
Cashback balances are displayed within the cardholder’s online banking portal or mobile app, often in a dedicated rewards section. When cashback is redeemed as a statement credit, it appears on the monthly statement as a credit, reducing the total balance due.