How Does Cash Back Work For Credit Cards?

October 2, 2020

For both personal and business cards, cash back reward programs are some of the most common (and useful) features that creditors offer. However, for as widespread as they are, the way they work can be mysterious to both individual and business users.

This guide will break down everything you need to know about how cash back rewards work for credit cards and how they can benefit your business.

Here’s what we’ll cover:

  • How cash back works
  • Credit card reward comparison
  • Other credit card money-saving tips for businesses

How Does Cash Back Work for Credit Cards?

Cash back is a rewards feature often included with credit cards. But how does cash back on credit cards work?

For a business or personal line of credit, the cardholder receives a certain percentage back on every dollar they spend whether in the form of money, points, or miles when using a cash back card. Depending on the card, there may be restrictions like:

  • An upper limit on the amount of cash back a cardholder can earn
  • Limits on what purchases qualify
  • Limits on when cash back can be earned or spent

A cash back card offers an incentive for card holders to utilize their line of credit.

Credit Card Rewards Points: Cash Back as a Game

Points are one of the most common forms of rewards on personal and business credit cards. The problem with points is that they are an indirect form of cash back that can turn the credit card rewards program into a game.

But how does the game work? There are two main elements:

  • Accrual – You score “points” for making purchases with your credit card. The points may be earned at one base rate (e.g., 5 points per $1 spent), or at special promotional rates for different rotating purchase categories (e.g., 10 points per $1 spent on travel expenses).
  • Redemption – Once you’ve accrued points, you then cash them in for rewards. One option may be direct cash back, at a different rate than the one at which points are gained. Other options include goods, services, or credits at participating retailers—like airline miles.

These are the two levels of exchange in a points system—money spent becomes points, then points become your reward. These layers make points systems indirect, relative to cash back. It’s like an arcade, you spend money to gain tickets, then use tickets to get a prize. The only problem is, that prize is never worth the same value you spent to get the tickets.

Credit Card Reward Comparison

Before you can choose the best business credit card, it’s important you review a credit card reward comparison to see which one is right for you. The general principle of a cash back reward credit card works the same way for card issuer options. But the specific way reward systems work in practice is worth comparing. When shopping for a business or personal credit card, you’ll need to determine what rewards scheme works best for you.

On one hand, points based systems incentivize and gamify spending on everyday purchases. The more points you score, the more money you can save. However, all that spending adds a “pay to play” element to the game. On the other hand, flat cash back rewards can prioritize the saving itself.

Points System: Incentivized Spending

In practice, points systems can amount to little more than a spending game. And, the savings you earn through your spending may be less, overall, than they would be with flat cash back.

Take, for example, a hypothetical points system representative of what many creditors offer:

  • All year, you earn a baseline of 1 point per $1 dollar spent
  • 100 points are redeemable for $1 dollar (1% cash back value)
  • Purchases in bonus rewards categories earn 3 points per $1 dollar spent
  • A maximum of 10,000 bonus points may be redeemed each year
  • In quarter 1, the bonus rewards rate applies to the category of office supplies

In this hypothetical, bonus purchases effectively offer 3% cash back, which may be greater than other creditors’ cash back offers. But all other purchases offer just 1%, which isn’t anything exceptional. Plus, purchasing office supplies outside of the bonus period entails losing out on the deal.

This incentivizes a purchase during the bonus period, even if it wasn’t necessary.

On its face, a points system can seem straightforward. But limitations and other rules can obfuscate its actual value. For example, the yearly limit of 10,000 bonus points may be reached before quarter 2. In that case, no purchases moving forward will accrue extra points. Suddenly you’re back to 1% returns.

Cash Back System: Incentivized Saving

In contrast with points, a cash back system is much more straightforward. Rather than gaming multiple levels of exchange, your rewards are always a given percent of credit spent. The sheer elimination of points from the spending equation shifts the focus away from scoring a deal.

If points systems are a game, cash back is a rebate built into every purchase made with credit.

Whether a cash back system operates at one flat rate or incorporates rotating bonuses, it is ultimately simpler. Take, for example, a system comparable to the one above:

  • You earn 1.5% cash back on all purchases, in all categories, year-round
  • There are no special rates applied to any categories of purchase
  • There are no limits on cash back accrued annually

In this hypothetical, there’s no need to spend more money in a short window to take advantage of higher potential savings. Spending $1,000 dollars on office supplies in January won’t save you more than spending $500 dollars on it in February, then another $500 dollars in August.

Rather than shifting the goalposts every quarter, you’re encouraged to save year round, as your savings stay at the same rate. Plus, the lack of a limit means your ceiling (potential savings total) is invariably higher than in a capped system.

For most businesses, cash back works best this way.

Other Credit Card Money-Saving Tips for Businesses

Cash back ultimately works to save money, and it’s the most straightforward rewards system. But it’s far from the only benefit credit cards offer businesses.

For one thing, a line of business credit enables increased spending flexibility. Business credit cards let a company spend upfront and handle payments on a short- or long-term schedule that works for them. So you can use business credit to take advantage of bulk pricing and avoid late fees.

On another level, some smart corporate cards also integrate a spend management platform for robust monitoring, analysis, and greater control over company spending.

Robust Spend Management Built In

In order to accurately cut down on business expenses, it’s necessary to account for transactions as they happen. Look for software that gives you real-time visibility over expenses with features like instant receipt matching, integration into communication channels (like Slack) for quick approval, and automatic updates to the general ledger. Ideally, you need a software that integrates with accounting software like Quickbooks to help facilitate end-of-month bookkeeping.

That’s not all expense management can help with. Robust platforms allow you to set precise limits across all your business credit cards. This gives you control over who is spending, how much, and on what.

Finally, with analytics at your disposal, you can identify and eliminate inefficiencies, saving money in the short and long term.

Get the Right Card for Your Business

The most essential takeaways about cash back on credit cards include:

  • Creditors reward cardholders with a portion of credit returned.
  • Flat cash back offers greater value than gamified points.
  • Cash back enables you to save money, while other credit card features like spend management platforms offer further cost-saving benefits.

So, where can you find a card with the right cash back program and savings features for your business? That’s where Ramp comes in.

The smart corporate card offers an unlimited 1.5% cash back on all purchases. Plus, the unique spend management platform grants you better visibility and control over all expenses, helping your entire organization stay on track with your financial goals.

Whether you need your corporate card to optimize cash back savings or help you budget for small business expenses, Ramp is your best option.


Money Under 30. How Do Cash Back Credit Cards Work?

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