How Do Cash Back Credit Cards Work?

"Cash back." It's a term we hear a lot. Cash back for being loyal to a particular department store. Cash back if you buy a car during an end-of-year blowout. And cash-back credit cards.

The idea is undeniably appealing, but likely also makes you wonder: Is it too good to be true? The short answer: no. Cash back rewards credit cards are one of several types of credit cards to choose from, but, like most things financial, whether it's the ideal choice for you depends on your situation. Before you can decide if a cash back credit card is for you, it's important to understand how the one you're considering actually works.

First Things First: Check the Card's Interest Rate - and Your Balance

Let's begin with the basics: In general, if you usually carry a balance every month, take a look at the interest rate on the card before you apply. Depending on how much of a balance you carry, you may end up paying more in interest than you get back. Also, notes Bruce McClary, Vice President of Public Relations and External Affairs at the National Foundation for Credit Counseling (NFCC), a higher credit score could potentially earn you better cash back rewards credit card offers. "That's another reason to build the healthiest credit score," says McClary. Especially when you're just starting out, "You have to realize you may not be able to get the offers you want until you work towards that history and credit score."

For three steps you can take to keep your credit healthy, read 3 Smart Ways to Improve Your Credit Health.

The Difference Is in the Details: Read the Fine Print

That said, it's really important to check out all the stipulations with this type of rewards credit card, since the specific terms can vary quite a bit between one cash back card and another. The general idea is that you'll get money back for using your card, but that's where the similarities end.

How much will you get paid, when, and for what? It all depends. Here are the key details to look at when weighing different cash back credit cards:

  • Does the credit card offer a straightforward percentage back on everything, or is it "$X back for every $X you spend?"
  • If it's a percentage, does it vary based on what you're buying or where you're shopping?
  • Is there an annual cap on how much you can get back?
  • How often will you get your cash back? Some cards pay you your "earnings" right away, while others credit less frequently, or when the amount hits a predetermined level.
  • In what form will you get your cash back? A check? A statement credit? This isn't a major consideration for some, but it's good to know what to expect.
  • What extras does the card credit offer? For instance, some pay a cash sign-on bonus when you enroll, provided you spend a certain amount within a specified period of time. Some even go so far as to pay you twice, once when you make the purchase, and again when you pay your bill.
  • Does the card charge an annual fee? If it does, it may not be a deal breaker, however. If the card pays the highest percentage back on supermarket purchases, and you're a family of six, the payback on your weekly grocery hauls may make the annual fee a non-issue.
  • What are the expiration, or forfeit, terms? Most cash back cards have them, whether they're a specified number of months, or something else, like missing a minimum payment.

Doing Your Homework Pays Off: Get More for Your Money

There's no way around spending a bit of time to research your options, but it's time well spent. Landing the right cash back credit card to suit your lifestyle and buying habits can pay off.

Dawn Lynch, a mom of twin fourth-graders in West Babylon, NY, took her time deciding which cash back card was right for her. She settled on one with a cash bonus for opening the account and a generous percentage back on gas. "I feel like I live my life in our minivan, running the boys to sports, activities, and school events. The cash back on gas was great, especially in the summers when we took road trips, and gas prices always seemed to spike," says Lynch. She echoed the sentiment of many cash back card fans: "I will only use a cash back card now. If I'm going to be spending all this money anyway, I want to get something back for it."

For more tips on how to choose the right credit card, check out "Can the Right Cash Back or Rewards Credit Card Help You Save Money?"

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.

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