What is a cash back credit card?

How do cash back credit cards work?

Time to get into the details. How do you actually earn cash back with a cash back card? 

Each cash back card has something called an “earn rate.” The earn rate is a set percentage that determines how much cash back you earn for every dollar you spend.

For instance, say your earn rate is 2%. That means you’ll get $2 back for $100 you spend with your card. Typically, earn rates vary from 0.5% to 5%.

Depending on your type of cash back card, your earn rate can also vary depending on what you’re buying. There are two different types: flat-rate and tiered-rate. 

What is a flat-rate card?

A flat rate card means you earn the same amount of cash back, no matter how or when you’re spending your money. If your rate is 2%, then you’re earning 2% of every dollar whether it’s for gas, food, travel, shopping, or anything else. The amount you earn stays consistent.

What is a tiered-rate card?

A tiered rate card offers different earn rates for different spending categories. So, while you might earn 2% when you fill up your car’s gas tank, you could get 5% back on your weekly grocery haul.

For example, the BMO CashBack^® Mastercard^®* features 3% cash back on groceries, 1% on recurring bill payments such as streaming services, subscriptions, or monthly utilities, and 0.5% cash back on everything else. Try our cash back calculator to get a sense of how much you could earn.

A few of the most common purchase categories include:

• Groceries and drugstores
• Gas and gas stations
• Utilities and recurring bills
• Streaming services
• Restaurants
• Travel 

At this point, you might be wondering: is cash back just free money? Since you have to spend money to earn money, it’s not truly free. But often, you’re getting cash back on things you’d be buying anyways, like groceries or your phone bill. 

Another important thing to keep in mind is that banks typically do not offer cash back on balance transfers, cash advances, interest charges, or other non-purchase transactions. Ultimately, it’s a good idea to consider your card issuer’s terms to avoid any misunderstanding.

What are the advantages of having a cash back credit card?

If you’re looking for a new credit card, you might be wondering why you’d consider a cash back card over other types of rewards cards.

The beauty of a cash back is that it is simple to understand. Points systems can feel much less straightforward. 

For example, some travel rewards cards set limits on how you can use your points, with restrictions around things like what airlines you can use or what dates you can fly. In contrast, using cash back rewards to pay for a trip gives you unlimited freedom and options, just like normal cash.  

Another advantage of a cash back card is flexibility. While some rewards cards lock you into using your points at certain brands or stores, cash back cards let you spend the cash you earn on anything you’d like. 

How to maximixe your cash back rewards

Looking to make the most of your cash back card? These tips can help you maximize the money you get back from your purchases:

→ Keep an eye out for welcome bonuses

Welcome bonuses can help supercharge your cash back by offering higher earn rates for a limited time. For instance, the BMO CashBack® World Elite®* Mastercard®*includes a special offer to help new cardholders earn more upfront.

→ Consider cash back card offers with annual fees

While annual-fee cards have a cost associated with them, they are a great option if you want to maximize your earning potential. No-fee cards are great for your budget, but those with an annual fee generally have higher earn rates that can generate more cash back for you if you spend enough, which can sometimes cover the fee itself. So, you’ll want to do the math to see which card is right for you.

→ Find a card that matches your spending habits

Making the most from the ways you already tend to spend money is one of the best ways to take advantage of a cash back card, without having to alter or augment your spending. For example, if you drive a lot for work, you might consider a card that offers a higher earn rate for gas purchases. 

→ Know your card’s limits

Many cards allow you to earn cash back up to a set amount. For instance, your card might offer 3% back on dining out, up to $500 spent during a given statement period. That means you’ll earn cash back until you spend over $500 on dining, at which point you may drop down to a lower earn rate.

How do you redeem cash back rewards?

Once you start accumulating some cash back, you’ll want to know how to actually put that money into your pocket. There are a few ways you can redeem your cash back:

• Deposit it into a chequing or savings account
• Transfer your cash back into an investment account
• Turn it into a statement credit on your cash back card

Some credit cards offer you an annual credit if you earn a certain amount by a specific date, while others don’t—this depends on your card issuer.

As long as you don’t need to wait for a certain date or reach a minimum amount, you can tap into your cash back whenever you want it. You can access it by withdrawing the cash back as a lump sum, or you can set up recurring payments that will automatically move your cash into your chosen account once it accumulates to a certain amount.

You can keep track of your cash back balance easily through online and mobile banking.

What’s the difference between cash back and other rewards programs?

While there’s a lot to love about cash back cards, they aren’t the only type of credit cards out there.

With some rewards cards, you’ll earn points that can be redeemed for merchandise, travel, and more. They work in a similar way to cash back cards, except you’re accumulating points instead of cash with each purchase. Sometimes you can use your points like cash by redeeming them for a contribution to a savings or investment account.

Keep in mind that your points may have a different value depending on how you’re redeeming them. With certain cards, your points are worth more when purchasing within certain categories. With cash back, you have a set amount to use and the value does not change, no matter what you’re buying.

Travel credit cards such as the BMO Ascend World Elite^®* Mastercard^® are great for the world explorers out there. These programs are specifically designed to reward and empower travel.

Typically, travel cards offer accelerated rewards on travel-related purchases—meaning you’ll rack up points faster when you spend on flights, hotels, and rental cars with your card. They can also offer benefits like travel insurance and airport lounge passes. The rewards you earn can be redeemed for flights, hotels, travel packages, experiences, and more.

While these programs are all different, they all have their own unique benefits. That’s why some savvy spenders have more than one card — it empowers them to rack up different types of perks and make the most of what each rewards program offers.

Along with cash back and rewards, you’ll also want to consider factors like an annual fee, insurance benefits, interest rate, and more.

The bottom line

A cash back card lets you earn cash based on your everyday spending habits, so you're rewarded each time you use your card.

When it comes to finding the right cash back card for you, there’s a lot to consider. Make sure to think about each option’s:

• Annual fee
• Interest rate
• Credit limit
• Rewards structure

You’ll also want to think about your spending habits, and which card aligns best with your current lifestyle.

Ready to start earning cash back? Explore our cash back credit card calculator to see how much you can earn based on your current spending habits. Or check out BMO’s popular cash back credit cards, to start finding the one that’s right for you.