You’ve seen them everywhere and may even have one in your wallet: credit cards with top-notch cash back rewards. But when you redeem credit card cash back, those rewards can add up to serious savings, and not just at your favorite stores.
From paying down debt to saving for retirement, a major purchase or even a rainy day, those cash back dollars can potentially pay you back on multiple occasions.
[Read: Best Cash Back Credit Cards.]
What Is Credit Card Cash Back?
Credit card cash back is a type of reward offered by some credit cards that gives you a percentage of eligible purchases back in cash. The best cash back credit cards tend to offer rewards of at least 1% cash back, with others offering rotating bonus categories with rewards of 3% to 5%.
While those percentages may seem small, they can really add up over time. For example, say you have a cash back credit card that you use to buy groceries every month. If that card gives you 2% cash back on your bill and you spend $600 monthly on groceries, you’ll earn $144 in cash back for the year. And if you pay your credit card bill in full each month and avoid paying interest, those rewards could translate to serious savings.
How Can You Receive Cash Back?
You can receive cash back from your credit card in various ways. While your options will vary based on your card, some of the most popular ways to redeem credit card cash back include:
— Cash. You can request a mailed check or an electronic deposit into your bank account.
— Statement credit. Use your accumulated rewards to remove a chunk from your credit card balance.
— Gift cards. Redeem your cash for gift cards from your favorite retailers.
— Merchandise. Many credit cards offer shopping sites where you can use rewards to buy merchandise from top brands.
— Travel. Your rewards could take you to the sky if your credit card offers miles, which can be used toward travel purchases.
[Read: Best Rewards Credit Cards.]
Best Ways to Redeem Cash Back
If you’re looking to build sound financial habits, the best ways to redeem cash back rewards likely won’t be to buy merchandise or gift cards. Instead, you can use your rewards to improve your financial picture and save for the future. And sure, using cash back to save might not have the allure of a shopping spree or a tropical trip over winter break. However, it’s a move that could pay serious dividends today and down the line.
Pay Off Debt
If you have high-interest debt, you can use your rewards to bring those balances down. “Make extra payments, or more than the minimum payment, by using your cash back rewards,” says Derek Miser, chief managing member at Miser Wealth Partners in Tennessee.
Not only can this move help you pay down debt faster, says Miser, but it can also lead to substantial savings on interest. Plus, there’s a bonus when you use your credit card cash back to pay down debt because it may just increase your credit score.
Pay for a Major — or Surprise — Expense
Whether your laptop is about to break or you’re faced with an extremely expensive college textbook purchase, cash back rewards can help. You can redeem rewards to pay off a major expense, which essentially erases the purchase from your credit card bill.
It’s important to remember that many credit cards offer flexible ways to redeem your cash back, says Chris Roncari, head of product and experience for U.S. Bank retail payment solutions. The way you redeem rewards from month to month can vary. “Understanding that flexibility can really help you maximize the value of your credit card,” says Roncari.
Start or Grow an Emergency Fund
Instead of letting your rewards sit in your credit card account, you can redeem your credit card rewards for cash and deposit it into your savings account that earns interest. By doing so, you can build up an emergency fund and potentially avoid the accumulation of credit card debt if life ends up throwing you a curveball.
“Cash back rewards put towards an emergency fund is more important than using them for a vacation,” says Miser — especially if you don’t have an emergency fund to begin with or need to build up your balance. A good rule of thumb is to have three to six months’ expenses in savings.
Save Toward Major Goals
Big goals require a solid savings commitment. Redeeming your credit card rewards for cash back on a regular basis can help increase your savings account balance. You can put those cash rewards to work in several different ways, including:
— Contributing to a college savings account, like a 529 plan
— Stashing cash in a high-yield savings account to prepare for a major purchase, like a down payment on a house
— Putting cash once a year into a certificate of deposit for a major long-term goal
The bottom line is to make use of the current high-interest-rate environment in order to build your savings instead of keeping your cash back rewards in your credit card account.
Invest for Retirement
“It may not seem obvious, but cash back rewards can be a strategic way to boost retirement savings,” says Miser. You can use your credit card’s cash payout option to transfer money to your bank account. From there, you can contribute to your individual retirement account.
It may seem counterintuitive, but spending with your credit card could potentially be the reason why you’re prepared for retirement — of course, provided you’re paying off your balance regularly and not accumulating credit card debt. Using your cash back card is a move that could improve your financial security later in life, says Miser. The more you save today, the more money you have enjoying the benefits of compound interest. Plus, all IRAs have potential tax advantages, including the deduction of contributions or tax-free distributions during retirement.
[Read: Best Credit Cards.]
How Can You Maximize Cash Back?
Earning cash back rewards is one thing, but knowing how to maximize them is another. “The No. 1 piece of advice I give is to take a few minutes to remind yourself about all the benefits and rewards details on the cards you already have,” says Roncari.
These tips can help you maximize your credit card’s cash back benefits:
Know Your Spending Categories
Some credit cards pay a flat cash back rate, while others assign specific cash back rates to different spending categories. Additionally, some credit cards have rotating or custom categories that you’ll need to track so you can get the highest cash back rates. Reviewing your card’s cash back features and spending categories can help ensure you’re not missing out on valuable earnings.
Know Your Caps
Many credit cards have caps on how much cash back you can earn in a quarter or a year. For example, your card offers 3% cash back on groceries up to $1,000 per quarter and then 1% on all purchases after that. If you spend $700 monthly on groceries for your family of four, you’re only earning $11 in cash back after exceeding the $1,000 spending limit.
To boost your cash back, you could use a different cash back credit card to earn a higher rewards rate after reaching the other card’s limit. You could also look for a different credit card that offers a higher cap on the categories that align with your spending patterns.
Know Your Perks
Some cash back credit cards have programs that could enable you to earn even more cash back with every online purchase. Whether it’s a shopping portal or a web browser extension, these programs can help you earn higher cash back rewards with participating retailers.
“When you have a choice of where to shop, check to see if your credit card has a meaningful cash back offer at specific stores to help you save even more,” says Roncari.
Browser extensions automatically detect the website you’re on and display the store’s cash back rate so you can activate the offer. When you shop through a card’s shopping portal, it will connect your purchase to your credit card.
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These Are the Smartest Ways to Redeem Credit Card Cash Back originally appeared on usnews.com
Update 03/05/25: This story was previously published at an earlier date and has been updated with new information.
