What Is Cash Back? Hint: It's Not Free Money

What Is Cash Back?

Cash back, also known as “cashback,” 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 above a certain dollar threshold.

Cash back also describes a debit card transaction in which cardholders receive cash from their bank account when they make a purchase—generally, a small amount above the item cost.

How Cash Back Works

Cash-back programs date to 1986, when the Discover card was launched nationally, introducing the concept. Since then, they have become a ubiquitous credit card reward, and nearly every major card issuer now offers the feature on at least one of its products. It’s an incentive for existing customers to use the card early and often and acquire new clients or poach them from a competitor.

Unlike traditional rewards points, which can only be used to buy goods or services, or gift cards offered by the card issuer, cash-back rewards are what their name implies: cash. They are usually presented to the cardholder on the monthly credit card statement.

Consumers may receive the cash-back reward through direct deposit to a linked bank account, as a statement credit reducing that month’s bill, as a gift card, or through the mail by check.

Cash Back Amounts

The amount of a cash-back reward can range from 1% to 5% of a transaction. Some transactions also offer extra rewards through merchant partnerships: Purchases at that merchant earn you more than purchases elsewhere.

When shopping for cash back cards, you'll often see different methods for earning cash back. Flat-rate cash back cards give you a flat or fixed percentage of your purchases. This can be a simple but straightforward way to earn cash back since you don't have to worry about making qualifying purchases.

On the other hand, you might see tiered-rate cash back cards, which means you'll earn cash back at different rates depending on the type of purchase or transaction level. For example, a cardholder might earn 3% back on gas purchases, 2% on groceries, and 1% on all other purchases. A special promotion where you can get cash back often 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 particular transaction level to qualify for cash back or other benefits; it’s usually 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 shares with the consumer a portion of the transaction fee that it charges merchants.

Cash Back Sites and Apps

Cash-back apps and websites can also help you earn money for shopping while using their tools. Many cash-back sites partner with retailers, such as Amazon and Target, to offer specific deals on items such as toys or holiday gear.

Cash-back sites usually operate like this: First, you download the app or extension and sign up for a free membership. Next, you sign into the cash-back site, use a link for the store you want to shop in, and start shopping.

The cash-back site or app records your purchases, and you earn money after your transactions are approved and go through. The cash back (a percentage of your spending) usually lands in a PayPal or bank account. Cash-back apps can be used to find money-saving deals while earning cash in different categories, including restaurants and delivery services.

Three popular cash-back programs are Rakuten, Ibotta, and Shopkick, although there are others.

Rakuten

This cash-back website was Ebates in another life. Rebranded as Rakuten in 2019, the site earns its money by getting commissions from over 2,500 stores, including Lowe’s, Kohl’s, Walmart, and Macy’s, for sending online bargain hunters its way. The commissions are shared with Rakuten customers, which is how you earn up to 40% of your cash back. If you have a PayPal account, then your earnings can go there, or the company can mail you a check.

Rakuten has mixed reviews on the Better Business Bureau (BBB) website, which gave it a B rating due to product and service issues, including customers saying they never received their cash-back rewards. The customer rating average is a poor 2.65 out of five stars, based on 191 customer reviews.

Ibotta

This cash-back app can be used in stores and online shopping via your mobile device. Its specialty is groceries. The app is enabled in hundreds of markets and large chain stores such as Trader Joe’s, Whole Foods, Wegmans, Costco, Hannaford, Walmart, Target, Aldi, and Albertsons, plus convenience stores such as 7-Eleven, Wawa, and Stewart’s Shops.

lbotta partners with more than 1,500 retailers and brands in categories that include health and wellness, travel, home and auto, kids and baby, pet supply, sports, and outdoors.

It also offers cash back on subscriptions, restaurants, and food delivery services. Ibotta doesn’t list the percentage that you’ll earn using the app. Still, according to its website, lbotta has paid out over $1.8 billion to more than 200 million users since 2012, when it was founded, and the company states that the redemption will show up in your account within 24 hours or less.

Like Rakuten, Ibotta earned a B rating from the BBB, and there are compliments and complaints from users—some of whom claim they haven’t received their cash back on time, while others say they are earning money quickly. Three hundred and sixty-one customer reviews average out to a 3.57 customer rating out of five stars.

Shopkick

This mobile app lets shoppers earn gift cards instead of cash, so while it is not exactly a cash-back tool, users can earn reward points, which the company calls “kicks,” for using the Shopkick app and scanning products in participating retailers. You then turn those points into gift cards for companies like Starbucks, Amazon, Target, Sephora, Best Buy, Barnes & Noble, PayPal, Apple, AMC, and more.

When you download the app, it will show you participating retailers and products that can earn you kicks. You can even use Bluetooth to earn a kick for entering a store without making a purchase. The app may also offer users exclusive incentives, discounts, and rewards points.

Shopkick has an A+ rating from the BBB, but as of September 2024, there were only 44 customer reviews, most of which involved complaints and averaged out to a 1.32 rating out of five stars.

Cash Back on a Debit Card

With debit cards and some credit cards, a 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 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 a rebate—the customer just charges more on the card.

Advantages and Disadvantages of Cash Back

The advantages of enrolling in cash-back programs are apparent. You get cash back for spending your money, whether using your credit or debit card or even shopping online.

On the downside, cash-back credit cards may have high annual percentage rates (APRs) or annual fees or put a cap on how much cash back you can earn, and you do have to spend money to earn the cash. Also, you can lose your earned rewards if you don’t pay your bills on time and your credit card is canceled.

The Bottom Line

Signing up with a cash-back rewards credit or debit card is a way to earn some extra cash based on your purchases. You can use a cash-back app or website to find potential deals on goods while also making a percentage of your money back. The more that you use your cash-back rewards programs, the more money that you stand to earn.

There are a few drawbacks to a cash-back rewards card, including a higher-than-usual APR, having to wait to access your cash-back funds and a cap on how much you can earn each year. Also, when it comes to travel rewards such as airline miles, sometimes the miles are worth more than the cash.