What Is Cash Back?

Cash back often refers to two types of financial transactions related to credit and debit cards that have grown increasingly popular in the last two decades. Most commonly, it's a credit card benefit that refunds the cardholder a small percentage of the amount spent on each purchase, or purchases above a certain dollar threshold.

Cash back also describes a debit card transaction in which cardholders literally receive cash at the time they make a purchase—generally, a small amount above the item cost.

key takeaways

  • Cash back refers to a credit card benefit that refunds the cardholder's account a small percentage of the sum spent on purchases.
  • Cash back rewards are actual cash that can be applied to a credit card bill or received as a check or bank account deposit.
  • Cash back can also refer to the practice of charging an amount above the purchase price on a card, and receiving the extra money in cash then and there.

The Basics of Cash Back

An outgrowth of general rewards programs offered by credit card issuers, cash back programs date back to the1990s. But they have become ubiquitous in the 21st century; nearly every major card issuer now offers the feature on at least one of its products. It's an incentive for old customers to use the card early and often, and for new clients to sign up for the card, or switch from a competitor's.

Unlike traditional rewards points, which can be only used to buy goods or services or gift cards offered by the card issuer, cash back rewards are (as their name implies) literally cash. Often presented to the cardholder on the monthly credit card statement, they can be applied to purchases on that statement—to help pay the credit card bill, in other words. Or, consumers may receive the cash-back reward directly, either deposited directly into a linked checking account or the old-fashioned way, through the mail by check.

1986

The year of the debut of the Discover card, which pioneered the cash back reward concept.

Cash reward percentages typically range from 1% to 3% of a transaction, but some can go up to 5%. Some transactions also offer double rewards through merchant partnerships: Purchases at that merchant earn you more than purchases elsewhere.

In fact, credit cards often offer varying levels of cash back, depending on the type of purchase or transaction level. As an example, a cardholder might earn 3% back on gas purchases, 2% on groceries and 1% on all other purchases. Often a special promotion might be in effect for three months, during which spending in a specific category—restaurants or department stores—earns a higher refunded percentage for that period.

Typically, the cardholder must reach a certain transaction level to qualify for cash back or other benefits; usually, it's small, around $25, but it varies from card to card. Some card companies also let cash rewards be used toward specific purchases, including travel, electronics or partnership incentive programs.

In issuing a cash-back reward, the credit card company simply shares with the consumer a portion of the transaction fee it charges merchants.

Cash Back in Hand

With debit cards and some credit cards as well, the customer may also get the opportunity to receive cash back immediately at a supermarket or other location. The customer can ask the merchant to add an extra amount to the purchase price and receive this additional amount in cash. Providers of services often do this, to let a customer leave a cash tip. However, unlike the cash back process described above, the practice isn't really a refund: The customer's just charging more on the card.