What is credit card cash back?

You’ve probably heard it before — get a credit card if you want to establish credit history. Credit cards can also help users finance purchases they otherwise could not afford, and many carry enticing perks to earn back money. One of the most common of these perks is “cash back,” where the credit card company pays back a percentage of the amount spent to the card holder.

In theory, cash back sounds perfect. Earning money when you spend money — yes please! But sometimes, cash back credit cards come with fees and other caveats you should be familiar with before signing up. So, here’s a breakdown of cash back and other rewards you can expect with many mainstream credit cards.

The basics of cash back

A cash back reward is either a dollar figure or a number of points that you earn every time you spend money with a credit card.

It’s important to understand the difference between earning cash back on each purchase versus earning points. Cash back rewards are pretty flexible – the user of a credit card is given a lump sum of money, usually in the form of a cheque or prepaid card, which they can spend on anything they desire. Points, on the other hand, may only be redeemable for certain prizes offered by the issuer of the card such as discount airline tickets, gift cards, or hotel rooms.

Regardless of which reward camp they belong to, cash back programs can encourage a credit card user to more carefully consider how they’re spending money ahead of time to ensure they maximize their financial gain in the long run.

Cash back is usually a percentage

The amount of cash back you can earn depends on the percentage figure set by the card company. A credit card issuer may offer 0.5% cash back on every purchase and an additional 1% cash back if you sign up during a promotional period.

In addition to offering a base percentage of cash back on every purchase you make, many credit card issuers partner with specific merchants to provide competitive cash back rates when you shop at those specific stores. Consumers who are considering getting a credit card for the first time should always review the cash back terms before deciding which card to get.

KOHO’s reloadable prepaid Mastercards work the same way. Cash back percentages are offered as a perk by virtually every major issuer of credit cards. You can get 1% cash back on groceries and transportation with KOHO Easy.

Get more cash back

Whenever you sign up for a credit card, take a look at their cash back partners. Some credit cards will offer a greater cash back rate on purchases made at select locations. KOHO also has a roster of exciting and ever growing cash back partners, like Baskin Robbins, Indigo, Kit + Ace, and so much more.

Keep in mind credit card issuers may have certain restrictions when it comes to earning cash back with partners. For instance, they may require consumers to spend directly through a partner’s store or app instead of going through a third party.

Additionally, cash back partners may change or grow over time, so keep an eye out for new earning opportunities when shopping. Most credit card companies send emails or texts to their customers when a new or limited-time-only offer arises, so pay careful attention to earn more points or a higher percentage than usual.

Cash back categories

Consumers can usually earn more points or a higher percentage of cash back by purchasing items or services that fall within certain categories as well. For instance, some credit card users can earn a higher rate of cash back than typical by spending money at restaurants or grocery stores. Alternatively, spending at gas stations or on select streaming services may be considered spending in a “special category” that yields extra points per purchase.

Read your credit card agreement to identify which select categories can earn you additional points or cash back and stay up to date with your company, as these categories can change.

Understand cash back limits

Most cash back programs come with annual cash back limits, or a cap of some sorts. If you’ve reached this limit, you should wait before making additional purchases if you want to maximize your financial gains. Again, make sure to read the credit card agreement to find out what the maximum limit is.

Specific industries, like taxi services and utility payments, may also charge higher rates when consumers pay with a credit card than with cash. If you’re relying on a service that includes an extra fee for using a credit card, the cash back rewards may not be worth it. Pay close attention to whether fees will be imposed before making a purchase with a credit card, even with the help of a cash back rewards program. You can visit the Canadian government’s official page on credit card fees to learn more.

Credit card users must understand that most cash back rewards programs are not necessarily instant discounts. In most cases, the cash back or points earned with purchases may take one or two billing cycles to become available to spenders. Additionally, certain credit card issuers may not make cash back rewards available to spenders until they meet a minimum spending threshold.

You should also note that some transactions may not contribute to cash back programs, especially purchases made abroad. Some credit card issuers charge foreign fees, making local currency the best option for savvy spenders looking to save.

At KOHO, we do things differently. You earn instant cash back, which means you can cash it out at any time. Additionally, there are no minimum spending thresholds or balance requirements — not now, not ever. You can also avoid foreign exchange fees altogether with KOHO Extra, which waives any and all FX fees.

Mastering cash back rewards

Despite the potential fees and limitations, cash back credit cards are a great way to spend your money. Especially now, with so many no-fee cash back credit cards available. Just make sure you review the card agreements, establish a solid credit history, and regularly pay back what you owe.