How Does Cash Back Work? (2024)

Cash back is when a percentage of a cardholder’s eligible purchase gets refunded to them. In the early 19th century, retailers introduced rebate discounts that allowed consumers to pay full price for an item then receive a credit at a later time.

Consumers often had to submit a rebate request and wait for weeks or months to receive the credit. Today, cash-back cards allow you to earn money back on various purchases at the end of each statement cycle.

Your cash rewards can then be used as a statement credit, deposited to your bank account or a few other options.

Depending on the cash-back card, you may earn a flat rate or tiered cash-back rate on your eligible purchases. A flat-rate cash-back card will typically give you one rate on all your purchases.

For example, the Brim World Elite Mastercard gives you 2 points per dollar on all purchases and those points can be redeemed as cash back on your statement as soon as you reach 100 points.

The BMO CashBack World Elite Mastercard on the other hand, uses tiered cash-back rewards including 5% cash back on grocery purchases up to $500 and then 1% cash back after that, 4% cash back on ground transportation up to $300 and then 1% cash back after that, 3% cash back on gas and at electric vehicle charging stations up to $300 and then 1% cash back after that, 2% cash back on recurring bill payments up to $500 and then 1% cash back after that and finally, 1% unlimited cash back on all other purchases.

Another type of cash-back program involves picking your own purchase categories and Tangerine is well known for this. The Tangerine Money-Back Card offers the opportunity to pick two purchase categories (three if you open a Tangerine Savings Account) that give you 2% cash back. You get 0.50% unlimited cash back on everything else.

How Cash Back Is Awarded

Cash back is usually awarded in dollars or as rewards points. Rewards points may stretch further than cash especially if you’re applying your points to travel, but each program is different. Cash is still convenient if you’re looking for a statement credit, a cheque or funds deposited directly to your bank account.

Some cards allow you to redeem gift cards to popular restaurants and retailers with your cash back rewards.

Your monthly credit card statement will typically show how much cash back you earned and what was awarded to you in the last 30 days.

Be sure to read the card issuer’s terms thoroughly to understand how and when cash back is awarded. Some cards, like the BMO CashBack World Elite Mastercard, as mentioned above, cap the amount of cash back you can earn in a particular purchase category up to a certain dollar amount. Once that cap is reached, the cash back you earn typically reverts to the cash-back rate earned on all purchases, which is usually 0.5% to 1% depending on the card.

Credit cards with cash-back programs incentivize cardholders to spend money on certain things. Card issuers make money from fees and interest payments and it’s in their best interest that cardholders spend regularly on their card each month.

As a consumer looking to get rewarded for your spending, you may be more willing to use a credit card for your groceries (instead of a debit card) knowing that you’ll earn cash back on the purchase.

The opportunity to earn cash back may also tempt cardholders to spend more than they normally would. It’s important to manage your spending with a cash-back card so you don’t accumulate a large balance that you can’t pay off by the end of your statement cycle.

Interest charges and even late payment fees can easily cancel out any cash-back rewards you receive.

How much you earn withcash-back cardsdepends heavily on the amount you spend and your strategy to maximize rewards. Here are a few practical strategies to help you earn more cash back from spending.

Consider the Categories You Typically Spend In

Review your spending to get a better idea of where your money is going. If you tend to spend a lot on groceries each month, a cash-back card that offers ahigher rewards rate for grocery purchasesmay be your best option.

If you don’t do the grocery shopping at your house or have a lot of recurring bill payments, then a credit card like the Scotia Momentum Visa Infinite Card, which offers 4% cash back in those purchase categories, may not be for you.

Look for a Card With a Welcome Bonus

Awelcome bonus, or sign-up bonus, gives you the opportunity to earn cash back by meeting a certain spending threshold during the first few months of activating your card. Not all credit cards offer a sign-up bonus, so consider the ones that do to maximize your cash back early on.

The CIBC Dividend Visa Infinite card comes with the following offer:

• CIBC Dividend Visa Infinite:Earn 10% cash back on the first four statements up to a total of $3,000 in net purchases along with an annual fee rebate in the first year.

Try a Choice Category Cash-Back Card

As stated above, the Tangerine Money-Back Card allows you to choose the category that you can earn a higher fixed rate of cash back in.

More specifically you can choose two categories where you can earn 2% cash back (a third if you open a Tangerine Savings Account) and you will earn 0.5% cash back on all other purchases.

This option can help you avoid feeling pressured to spend in areas that don’t make sense for your financial needs and lifestyle.

Watch Out for Fees

In some cases, it’s best to choose a cash-back card that doesn’t have an annual fee. If the fee for a card is $120, this means you’ll net fewer cash-back rewards annually due to this added cost. However, you should also consider how many rewards you would earn with different cards. Cards with annual fees typically offer higher reward rates.

If the card has foreign transaction fees, as most do in Canada, this will also cost you extra if you use it to make purchases out of the country.

Even if you’re earning 5% or 6% cash back on your purchases, having too many credit card fees can cancel out your rewards.

Don’t Carry a Balance Each Month

We recommend no one ever carry a credit card balance if possible. Carrying a balance subjects the cardholder to interest charges which can add up to more than the cash-back rewards amount you earn, and quickly.

We recommend only spending an amount you feel comfortable with paying back in full at the end of the month.

Earning cash back can be easy and makes sense if you’re using a credit card to make regular purchases anyway. If you’re looking to reward yourself with some extra cash, it’s worth considering at least one quality cash-back card to keep in your wallet.

It’s important to consider some of the drawbacks to cash-back cards, as well, like the cap on how much you can earn or even limited redemption options. Also, if you’re looking for travel rewards like airline miles and hotel points, these rewards can be worth much more than the cash.