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How Does Cash Back Work?

How Does Cash Back Work?

Editorial Note: This content is not provided by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by the issuer.

Credit card companies typically offer a plethora of rewards options for their cardholders to take advantage of. But cash back has long been a favorite of many, as it gives you the chance to earn cold, hard money for making everyday purchases. If you’re confused about how cash back works, read on for a full explanation.

How Cash Back Works

At its core, cash back refers to a predetermined percentage of a purchase you make being returned to you as cash rewards. Cash back rates typically range between 1% and 5%, though there are some outliers to be mindful of. Credit card issuers will usually clearly label what types of purchases earn what level of cash back. But like anything in the credit card industry, you must read the fine print.

This is mainly because all purchases and cash back rewards are governed by merchant category codes, or MCCs. Credit card companies ultimately determine these designations, with Mastercard, Visa, American Express and Discover calling the shots. Some common codes are “restaurant,” “department store,” “airline” and “entertainment,” among others. So if you earn 5% bonus cash back at restaurants and you go to Burger King — which has a restaurant MCC — you’ll get that 5% back.

But what these limiting MCCs sometimes don’t take into account are businesses that could fit into more than one category. Included in this group are hotels, superstores like Walmart, tourist attractions like museums and other multi-faceted establishments. In turn, you could lose out on cash back if you’re confused about which category a purchase you made falls into.

As an example, let’s say your family orders room service while on vacation in The Bahamas. You pay with your credit card thinking you’ll get the advertised 3% cash back on dining. When your credit card statement comes in the mail, however, you’ve only received the base 1% earnings. This is because the MCC of your hotel is just that, a hotel, which leaves your credit card issuer blind to what you really bought.

Unfortunately situations like these often offer very little recourse, as your card’s issuer has no ability to change these codes. In fact, only the major credit companies can change their own code selections.

New cardholders will often receive cash back promotions and bonuses. These offers can either be recurring — monthly, quarterly, yearly, etc. — or simply for just one period of time, usually at the beginning of your account’s life. Hypothetically, a recurring bonus might look like this: “Earn 3% cash back at supermarkets and wholesale clubs, up to $1,500 in purchases each quarter.” On the other hand, a one-time promotion might allow for 5% cash back on airfare purchases made during the first three months you’re a cardholder.

Depending on your card, cash back may be capped or it could expire after a period of time. While some cards feature both an earnings limit and expiration dates, others may have no restrictions. All cash back cards have their own, unique system surrounding them. So it’s important to refer to your documentation whenever you have a particular question.

Using Your Cash Back Earnings

How Does Cash Back Work?

The vast majority of cash back credit cards offer variations of the same choices for redeeming rewards. Most often, you’ll see statement credits, checks, bank account deposits, gift cards and charitable donations available to you.

  • Statement credit – Instead of receiving your cash back in-hand, you can apply it to your upcoming monthly bill, saving you money in the process.
  • Check – As one of the more direct ways of redeeming cash back, checks allow you to basically do whatever you want with its value.
  • Bank deposits – Eligible accounts usually include checking accounts, savings accounts or investment accounts.
  • Gift cards – With this option, you can convert cash back into retail credit at a store or website at which you want to shop.
  • Donations – Many card issuers have open relations with charities. These partnerships open the door for you to aid your favorite causes with real money.

It’s by far the easiest to redeem cash back through your card issuer’s website that it provides. Here you’ll not only see your rewards status, you will also know every possible redemption you could make. If you’d rather talk to a real person, most companies still have rewards phone lines you can call, as well.

Those who’d rather not have to worry about where their rewards currently stand will find that a redemption threshold might be helpful. Not all cards offer this feature. But if yours does, set a threshold at which your cash back is automatically redeemed in any manner you desire. Additionally, some cards require you to attain a certain amount of cash back before redeeming is possible.

Cash Back With Each Major Credit Card Company

what is cash back

There are tons of different cash back cards, depending on your credit score you may be eligible for some but not others. While it’s impossible to give universal specifics for each credit card company, below we’ve provided overviews of some of the most popular cash back cards.

Citi Double Cash Card (Mastercard)

Cash Back Rate: 1% at the time of purchase, 1% when you pay them off

Limit or Expiration: No limit; Expires if no eligible purchases are made for 12 months

Redemption Options: As a check, statement credit or gift card

The “double cash” nature of the Citi Double Cash Card means you effectively earn cash back twice: first when you make the initial purchase and again when you pay your credit card bill. The 12-month expiration is fairly standard and the lack of limits on how much cash back you can earn is generous. Statement credits, checks and gift cards are three of the most common redemption choices, so it’s no surprise to see them offered here.

Bank of America® Cash Rewards credit card (Mastercard)

Cash Back Rate: 3% in the category of your choice, 2% on purchases at grocery stores and wholesale clubs, 1% on other purchases

Limit or Expiration: Cash back on choice category, grocery stores and wholesale club purchases is limited on up to $2,500 in combined purchases each quarter; No expiration dates

Redemption Options: Once you have $25 or more, you can redeem as a statement credit, a check or a deposit to an eligible Bank of America® or Merrill Lynch® account

Take note of the combined $2,500 quarterly limit on 3% and 2% cash back in category of choice and at grocery stores and wholesale clubs, respectively. The Bank of America® Cash Rewards credit card also requires cardholders to have a minimum of $25 in earned cash back before they can redeem.

Blue Cash Everyday American Express Card
(American Express)

Cash Back Rate: 3% on U.S. supermarket purchases, 2% on U.S. gas stations and select U.S. department store purchases, 1% on other purchases

Limit or Expiration: 3% rate at U.S. supermarkets is limited to $6,000 a year in purchases then drops to 1%; No expiration dates

Redemption Options: After earning at least $25, redeem as a statement credit in $25 increments; Gift cards and merchandise redemptions from time to time

Amex offers some of the strongest rewards cards around, and the Blue Cash Everyday American Express Card is no exception. It does come with some limits; namely the 3% cash back rate on U.S. grocery store purchases is capped at $6,000 in purchases a year. At that time, cardholders earn 1% in cash back on groceries.

Discover it® Card
(Discover)

Cash Back Rate: 5% in rotating categories like gas station, supermarket, restaurant, Amazon.com and wholesale club purchases, 1% on other purchases; Full cash back match at the end of your first year

Limit or Expiration: $1,500 cap on purchases that earn the 5% rate each quarter; No expiration dates

Redemption Options: Statement credits, deposits to a bank account, gift cards and eCertificates, pay with cash back at select merchants and charitable donations

Discover cards offer great first-year cash back matches and distinctive cash back categories. These traits are on full display with the Discover it® Card. This includes 5% cash back on purchases ranging from dining to Amazon.com. However, there are limits for this rate and you have to opt in to categories each quarter to qualify. This card also offers five redemption options — the most on this list.

Tips to Maximize Cash Back Potential and Minimize Credit Risk

  • Cash back is one of the most prolific perks that the modern credit card market has to offer. But it’s important that you don’t overspend outside of your means just for the sake of rewards. Because many cash back cards come with higher annual percentage rates (APRs), this could force you into large, unsustainable interest payments.
  • Whenever possible, swipe your card for purchases in bonus categories. Not all cards have these to offer, but most do. So make sure you know which cards in your wallet offer bonuses at places like gas stations and supermarkets.
  • Know what types of redemptions — statement credits, bank account deposits, gift cards etc. — work best for you. This will drastically narrow down your card options, making the decision process much simpler.

Photo Credit: ©iStock.com/4×6, Â©iStock.com/Pgiam, Â©iStock.com/Ridofranz

Editorial Note: This content is not provided by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by the issuer.

Advertiser Disclosure: The card offers that appear on this site are from companies from which SmartAsset.com receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). SmartAsset.com does not include all card companies or all card offers available in the marketplace.

The post How Does Cash Back Work? appeared first on SmartAsset Blog.

Source: smartasset.com

How I earned more than $2,500 using credit cards in 2020

I racked up $1,732 in cash back from my 2020 credit card spending (a 2.8% return). If you include the $500 introductory bonus I earned on one of those cards, the total increased to $2,232 (a 3.6% return). Using a credit card that offers purchase protection, I also received $299 to repair a broken Apple Watch. Throw that in, and my total was $2,531 (a 4.1% return).

All of this proves why credit cards can be so valuable. I didn’t pay any interest in 2020, which is key to any good credit card rewards strategy, because the average credit card interest currently sits above 16%. I also only paid one annual fee ($95), which I factored into my calculations.

That was for the Blue Cash Preferred® Card from American Express, and it was well worth the fee. I used the card mostly for groceries because it offers 6% cash back on up to $6,000 of annual spending at U.S. supermarkets, then 1% after that. I maxed out that limit, which was worth $360 of cash back all by itself.

I also benefited from the card’s 6% cash back on select streaming subscriptions and 3% at U.S. gas stations.  And I nabbed another $43 in cash back via Amex Offers. Even after accounting for the annual fee, I earned a total of 5.6% cash back on this card in 2020.

Read more from our credit card experts.

Ask Ted a question.

The other cards I used

I also earned 5.6% cash back on my spending on the Wells Fargo Propel American Express® card. That surprised me, because the COVID-19 pandemic cut substantially into my travel and dining spending (this card gives 3% cash back on both categories). I did take one big trip in early 2020 though.

Later in the year, I took advantage of a few 10% cash back grocery promotions through the Wells Fargo Earn More Mall. The biggest surprise I uncovered while preparing this year-end recap was how much the card-linked offer promotions added up on my Propel and Blue Cash Preferred cards.

My Chase Freedom Flex℠ card yielded a 4.4% total return. I started the year with the Chase Freedom and switched to the Freedom Flex once it debuted in September. I maxed out two of the four quarterly 5% cash back promotions (cardholders need to activate these and they’re capped at $1,500 in spending, then you earn 1% after that). I came close in another quarter and hit roughly half of the limit in the other. This is also the card I have to thank for my $299 purchase protection claim.

For categories that I couldn’t maximize on one of these cards, I started the year putting everything else on the Capital One Quicksilver Cash Rewards Credit Card (1.5% back on all purchases). In February, I signed up for the Capital One Venture Rewards Credit Card, and that became my primary “everything else” card because it gives 2 miles per dollar on all purchases.

While this is technically a travel card, Capital One expanded the card’s redemption options soon after the pandemic hit to include statement credits (akin to 2% cash back) on eligible takeout, delivery and streaming services. The promotion has been extended through April 30, 2021, and it has worked out very well for me.

got at least some relief in 2020.

I think I’m an especially good candidate because I use this card a lot. If I’m turned down, I’ll have to consider switching to a no annual fee 2% cash back card like the PayPal Cash Back Mastercard the Fidelity Rewards Visa Signature card or the Citi® Double Cash Card, which gives you 1% when you make a purchase and 1% when you pay it off.

My top card suggestions for 2021

Someone who wants even more simplicity might opt for the Alliant Visa Signature Card. It gives 2.5% cash back on all purchases, although there’s a $99 annual fee (waived the first year). The 2.5% rate is capped at $10,000 in monthly spending. Factoring in the annual fee, you need to spend $20,000 or more annually to come out ahead with the Alliant Visa Signature, compared to a 2% cash back card.

In your first year as a cardholder, the Discover it® Miles card is also particularly lucrative. The card offers 1.5 miles on all purchases, but Discover will automatically match any earned cash back in your first year as a cardholder, effectively earning you 3 miles per dollar. After the first year, the rewards rate drops to 1.5 miles per dollar.

If you have at least $100,000 in eligible savings or investments, Bank of America has a couple compelling options through its Preferred Rewards program. At that threshold, cardholders earn a 75% rewards bonus. That means the Bank of America® Cash Rewards credit card would offer 5.25% cash back on a monthly category of your choosing, 3.5% on grocery and wholesale club purchases and 1.75% on everything else (the top two categories are capped at $2,500 in combined quarterly spending).

Meanwhile, the Bank of America® Premium Rewards® credit card would give 3.5% cash back on travel and dining and 2.625% on everything else if you have that six-figure savings or investments balance.

Final thoughts

I’m not ready to sign up for a new card just yet, but I expect 2021 will be an interesting year. If the COVID-19 vaccine rollout progresses well and the economy rebounds, there should be a lot of compelling credit card offers on the market.

Have a question about credit cards? E-mail me at ted.rossman@creditcards.com and I’d be happy to help.

Source: creditcards.com

Amazon Prime Card offering new Whole Foods card art, limited-time bonus

On Jan. 20, Chase announced a new card design option for the Amazon Prime Rewards Visa Signature card featuring Whole Foods Market art and added a limited-time sign-up bonus offer for those who prefer to shop at Whole Foods in-store.

Amazon has become a leader in grocery shopping during the pandemic, with consumers avoiding grocery stores due to health safety concerns – not to mention the convenience of shopping from a web browser. Amazon Prime members can enjoy speedy free delivery, as well as get access to online shopping at Whole Foods Market and special member deals when shopping in-store.

They can also count on extra savings if they carry the Amazon Prime Rewards card from Chase – or if they’re looking to apply in the next few weeks.

Here’s what you need to know.

Amazon Prime Rewards Visa Signature card

Amazon Prime Card Whole Foods

Our rating: 3.8 out of 5
Score required: Good to excellent
Type of card: Cash back
Spending categories: Amazon, Whole Foods, restaurants, gas stations, drug stores

  • 5% back on Amazon.com and Whole Foods purchases
  • 2% back on restaurant, gas station and drug store purchases
  • 1% back on other purchases
  • $70 Amazon.com gift card upon approval or $100 statement credit after spending $100 at Whole Foods in first 2 months
  • No annual fee

Our take: While the Amazon Prime Rewards card offers excellent cash back on Amazon and Whole Foods purchases, it might not be the best choice for customers who don’t currently have a Prime membership and aren’t looking to subscribe.

A new Whole Foods card design and limited-time offer

Chase introduced a new card design option for new Amazon Prime Rewards cardholders, featuring Whole Foods Market art. New cardmembers with an eligible Prime membership can choose the new design when they apply for the card. If you’re an existing cardholder and would like to switch to the new design option, you can call in to request a new card after Jan. 22.

If you frequently shop at Whole Foods in-store, the new limited-time introductory offer can also be exciting news for you. Through March 3, new Amazon Prime Rewards Visa cardholders can earn a $100 statement credit after spending $100 in Whole Foods Market stores in the first two months from account opening. Alternatively, they can still choose the standard $70 Amazon gift card offer as a sign-up bonus.

Considering the standard bonus is lower, the new temporary offer might be a better deal. On the other hand, if you avoid shopping in-store or normally use Amazon Fresh for buying groceries, the gift card might make more sense for you.

Should I start shopping at Whole Foods if I have an Amazon credit card?

If you already shop at Whole Foods, the 5% back with the Amazon Prime Rewards Signature Visa and 10% off specially marked items is a good deal. The discounts, though, don’t make Whole Foods cheaper than other grocery stores.

In fact, according to a study from 2019, Whole Foods remains the most expensive grocery store with its prices at 34% above Walmart, which was reported to have the lowest prices overall. If your goal is to save on groceries, Whole Foods is evidently not the best option – even if you carry the Amazon Prime card.

Other cards to consider

The Amazon Prime Card isn’t the only option you should consider if you often shop on Amazon or at Whole Foods.

See related: Which is the best card to use on Amazon.com purchases?

For instance, with the Chase Amazon.com Rewards Visa card, you can get a $50 Amazon gift card upon approval and earn 3% on Amazon and Whole Foods purchases, 2% percent at restaurants, gas stations and drugstores and 1% on all else. If you don’t have a Prime membership and aren’t looking to subscribe, this is a good option, since the card doesn’t require a cardholder to be a member.

If you do have a membership and shop on Amazon a lot, the Amazon Prime card is a better deal. With 5% for purchases made at Whole Foods and on Amazon, 2% at restaurants, gas stations and drugstores and 1% on all else, this card is hard to beat for Amazon and Whole Foods lovers.

If you’re looking for a card to buy groceries, consider the Blue Cash Preferred® Card from American Express, which could save you more than the Amazon Prime Visa at Whole Foods. Why? Blue Cash Preferred cardholders earn 6% cash back at U.S. supermarkets (up to $6,000 in purchases per year, then 1%).

See related: Best credit cards for grocery shopping

Bottom line

You can now stack your rewards at Whole Foods, earning cash back and the limited-time bonus with the Amazon Prime Card, and you can get extra savings from the loyalty program. Whether it makes sense to shop at Whole Foods, even with rewards cards and the loyalty program, is up to you.

Source: creditcards.com

Cash back perks to look for in 2021

If you’re like many people, your spending habits changed in 2020. You probably traded travel and in-person dining for online shopping and takeout. You may have even added a streaming service or two to your list of subscriptions.

Credit card issuers have started offering new perks and rewards to address these changes. And though these perks try to solve for pandemic woes, there’s something to be said for the convenience they offer, even when normalcy returns. There are also a few long-standing features, like online shopping portals, that belong in the credit card conversation now more than ever.

The best cash back card for you depends on your spending habits. So when your budget or lifestyle changes, you should make sure your credit cards are still bringing you consistent value. Here are a few cash back credit card features you need to look out for in 2021.

All information about Capital One Savor Cash Rewards Credit Card, Amazon Prime Rewards Visa Signature, Wells Fargo Propel and U.S. Bank Cash+ Visa Signature has been collected independently by CreditCards.com and has not been reviewed by the issuer.

1. Discounted grocery and takeout delivery services

If you’re planning to do a fair portion of your dining at home this year, you should look for a card that makes that easier and cheaper. With the right card, you can earn rewards on restaurant and grocery store purchases, while also saving on the services that deliver them, like Uber Eats, Doordash and Instacart.

Here are a few of our favorite cash back cards for food delivery:

American Express® Gold Card – You’ll get up to 12 months of complimentary Uber Eats Pass membership, as long as you’re enrolled by Dec. 31, 2021. This service usually costs $9.99 per month, offering an unlimited $0 delivery fee for restaurant orders and 5 percent off restaurant orders over $15, along with a $0 delivery fee on select supermarket groceries over $30. In addition, you’ll get up to $120 in annual dining credits for eligible purchases with Grubhub, Seamless, Boxed and more.

Chase Sapphire Reserve® – If you enroll by 12/31/2021, you and your authorized user(s) will receive at least 12 months of complimentary DashPass (usually $9.99 per month), which means free delivery on qualifying DoorDash orders. You’ll also get up to $60 in DoorDash credits in 2021.

Capital One Savor Cash Rewards Credit Card – Because it’s in the Mastercard network of credit cards, you’ll get two months of Instacart Express, including $0 delivery fees on orders over $35. You can get this benefit with any US-issued Mastercard card, but the Capital One Savor is an especially good option because it also offers 4% cash back on dining and 2% cash back on grocery store purchases.

2. Online shopping portals and rewards

Though cash back cards are known for their simple redemption process, you can often get even more value by using their shopping portals. Not every card and issuer has this option, but it’s certainly worth looking into if you now prefer to do your shopping digitally.

For example, the Shop Through Chase portal features deals from over 200 retailers, offering boosted cash back rates as well as discounts on purchases at stores like Nike, Banana Republic, Sephora and Under Armour. Other shopping portals include the Wells Fargo Earn More Mall and the Citi Bonus Cash Center.

Another option is to use a credit card that offers boosted cash back on online shopping purchases. While the cash back rates may not be as high as you would find in a shopping portal, you’ll earn consistent cash back on all of your online shopping purchases, regardless of the merchant.

Our favorite cash back card for online shopping is the Bank of America® Cash Rewards credit card, which earns 3% cash back on a category of choice (gas, online shopping, dining, travel, drug stores or home improvements and furnishings), as well as 2% cash back at grocery stores and wholesale clubs. Note, however, that those rates apply only to the first $2,500 in combined grocery store/wholesale club/choice category per quarter. After that, it’s just 1%.

Another contender is the Amazon Prime Rewards Visa Signature. You have to have a Prime membership to get it, but the rewards offer serious value for Amazon lovers. Cardholders earn 5% cash back on Amazon.com and Whole Foods purchases.

3. Streaming service rewards

As streaming services continue to multiply, it seems like you need two or three subscriptions just to stay up to date on your favorite shows. Earning cash back for your subscriptions can make this pleasure a bit less guilty.

The best card for earning cash back on streaming services is the Blue Cash Preferred® Card from American Express, which offers 6% cash back on select U.S. streaming subscriptions, including Disney+, HBO and HBO Max, Hulu, Netflix, Apple TV, Prime Video and more.

Another great card that offers rewards for streaming subscriptions is the Wells Fargo Propel American Express® card, which offers 3 points per dollar for select streaming service subscriptions. While this isn’t strictly a cash back card, you can redeem your points for cash back at the same value. Plus, there’s no annual fee.

4. Rewards on utilities

If you’re working from home or spending more time indoors, your utility bills have probably increased this year. It might instinctively feel wrong to pay bills with a credit card, but it can actually save you money. With the right card, you can earn cash back on your energy, electricity, gas and water bills. Just make sure your utility providers don’t charge a convenience fee for using a credit card.

The best cash back card to use for home utilities is the U.S. Bank Cash+™ Visa Signature Card. This card allows you to pick two categories from a list of 12 to earn 5% cash back in (on up to $2,000 in combined purchases per quarter). On that list of twelve is home utilities. If you were to spend $150 on eligible utilities each month, that 5% cash back would put an extra $90 in your pocket annually.

Bottom line

The start of a new year is a perfect time to assess your budget and credit card strategy. If you’re earning a measly 1% cash back or nothing at all on a significant portion of your budget, consider applying for a credit card that will help you make the most of those expenses. Check out our full analysis of the best cash back credit cards and apply securely when you’re ready.

Read more:

  • How cash back credit cards work
  • Best credit cards for grocery shopping
  • Best credit cards for restaurants
  • Best flat-rate cash back credit cards

Source: creditcards.com

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