As our economy tightens household budgets across the country, cash back credit cards have become increasingly popular. A cash back credit card offers a rebate on your spending. For instance, if you spend $500 and your card offers a 1% cash back reward, you’ll earn $5. Not too shabby, right? 

It’s important to understand how cash back credit cards work and learn about the different types that are available. Those two bits of knowledge can help you choose the right credit card for your spending style.

What is cash back on a credit card?

Cash back on a credit card is effectively a rebate for your spending.When you use a cash back credit card for a purchase, you’ll receive a predetermined percentage of your transaction deposited into a rewards account. For example, let’s say you spend $600 monthly on groceries. By paying with a credit card that offers a flat 2% cash back on all purchases, you’ll receive an effortless $12 rebate each month.

All to say, the cash back you earn from swiping your credit card does not count as income. You get to keep 100% of that “profit.”

How do cash back credit cards work?

Cash back credit cards are generally straightforward. When you make a purchase with your card, you’ll earn a rebate for each dollar you spend.

Many cash back credit cards offer bonuses when using your card for specific expenses. Depending on your card’s bonus categories, you’ll generally earn between 1 cent and 10 cents back. As you spend with your cash back credit card, your earnings will accrue in a separate rewards account until you decide to redeem them.

You can redeem your cash in several different ways, such as for statement credits to offset your current credit card balance or a direct deposit into your bank account. It’s also worth noting that not all credit cards marketed as cash back actually earn cash. Some earn bank points which can be redeemed for cash back, or they can be transferred to airline and hotel programs for free travel.

Average cash back rewards on credit cards

Cash back credit cards offer vastly different earning rates. Some offer powerful bonus categories that can give you a return between 1% and 5% (or even higher) for common expenses, while others offer a flat 1.5% back for everything.

If you hold a cash back credit card that doesn’t deliver an average return of 1.5% for your spending, you’re getting a below-average return. For example, let’s say you spend:

$2,000 per month in your credit card’s 3% bonus category

$1,000 per month in your credit card’s 1% bonus category

You’ll earn $70 for your spending, giving you an average return of 2.3% ($70 in earnings for $3,000 in spending)–a very respectable return.

Cash back credit card pros and cons

So what is cash back good for, anyway? The short answer is: Lots. But depending on your situation, cash back may not be the optimum rewards currency for you.

“From my perspective, simple is always better for customers,” says Kieran Makam, the Head of Product Management for Consumer Cards at Wells Fargo. “Most customers just want something that they don’t feel like there are any catches. [The value of] cash rewards are easy to predict.”

Pros

Flexibility. Cash back can be redeemed for just about anything.

Straightforward redemption process. It doesn’t take research and strategy to maximize cash back.

Intrinsic value: You know exactly what you’re getting for your spending.Cons

Less valuable ongoing benefits. Travel rewards credit cards routinely offer more valuable perks.

Annual bonus caps. Cash back cards often limit the rewards you can earn with bonus categories each year.

Less potential value than travel rewards. 1 cent in cash back is always worth 1 cent–but it’s possible to receive 2 cents (or more) from a single airline mile or hotel point, depending on how you use them.How to earn cash back rewards from your credit card

The amount of cash back you earn depends on the credit card you’re using. Some cards offer the same return for all spending, while others reward you for spending in specific categories. Some even require that you regularly enroll your card to be eligible for a bonus.

“A very cost-conscious consumer may turn away from a card that has an annual fee,” says consumer spending, shopping, and savings expert Trae Bodge. “But if you are putting a lot of expenses on your credit card, from groceries to gas to regular shopping to bills, you may want to look at a fee-based credit card. They typically have more generous opportunities to earn cash back.”

Flat-rate cash back credit cards

Put simply, flat-rate cash back credit cards offer the same return for all purchases.

A card like this is an extremely powerful weapon in a cash back seeker’s arsenal. Credit cards that provide bonus categories are certainly important, but a solid flat rate credit card guarantees that you’ll get a respectable return on all spending that falls outside of those categories. Think expenses like medical bills and car maintenance.

Here are a few examples of credit cards offering cash back rewards:

Rotating category cash back cards

Rotating bonus category credit cards offer temporary bonus rewards for spending categories that change every three months.

As an example, the Chase Freedom Flex℠ might earn 5% back (5 Chase Ultimate Rewards® points per dollar) on up to $1,500 in spending for gas or EV charging stations and select live entertainment after you activate the bonus. But these categories change regularly, so always check the fine print.

The Chase Freedom Flex also earns:                           

5% back (5x points) for travel reserved through the Chase Travel Portal                                                        

3% back (3x points) for dining                                            

3% back (3x points) at drugstores

1% back (1x points) for all other eligible purchases

The Discover it® Cash Back card also offers bonus categories that rotate each quarter. While you have to activate the category, Discover will send you an email reminder before the new quarter begins; to activate, you just click a link in the email, and you’re good to go. 

Choose-your-category cash back cards

Escalating in popularity are credit cards that allow you to choose which of your purchases earn a bonus.

For example, the Citi Custom Cash℠ Card earns 5% back (fulfilled as Citi ThankYou points) on up to $500 in purchases each month in whichever following category you’ve spent the most money:

Drugstores

Fitness clubs

Gas stations

Grocery stores

Home improvement stores

Live entertainment

Restaurants

Select streaming services

Select travel

Select transit

You’ll earn 1% back (1 point per dollar) on all other eligible purchases.

The U.S. Bank Cash+® Visa Signature® Card is another noteworthy choose-your-own bonus category option. It allows you to select categories that other credit cards neglect. You’ll earn 5% cash back for two eligible categories of your choosing (for up to $2,000 in combined spending each quarter, then 1%). Eligible categories include:

Cell phone providers

Department stores

Electronic stores

Fast food

Furniture stores

Ground transportation

Home utilities 

Gyms and fitness centers

Movie theaters

Select clothing stores

Sporting goods stores

TV, internet, and streaming services

You’ll also earn unlimited 2% cash back for either grocery stores, gas and EV charging stations, or restaurants.

Finally, you’ll earn 5% cash back on prepaid travel (airfare, hotels, and rental cars) reserved through the U.S. Bank Rewards Center and 1% back on all other eligible purchases.

Frequently asked questions on cash back credit cards

What credit card gives you the most cash back?

The credit card that gives you the most cash back will depend on your spending habits. You may earn up to 10% back for select purchases with certain credit cards. The best bet for most is to find a card that earns a flat 2% cash back on all purchases, such as the no-annual-fee Wells Fargo Active Cash card.

Does cash back mean free money?

Cash back isn’t technically free money. However, earning cash back from spending is not taxable. The IRS considers cash back to be a “rebate” for your spending.

On a related note, any cash back that isn’t earned from spending is usually taxable. For example, if you refer a friend to a credit card and earn a referral bonus, you’ve been compensated by a bank for helping them acquire a new customer. That qualifies as income, not a rebate.

What is a cash back bonus on a credit card?

A cash back bonus on a credit card can indicate more than one thing. It can mean a welcome offer meant to persuade you to open the card. It can also mean cash back earned in addition to a card’s base earning rate for certain purchases.

Original: Fortune | FORTUNE: What are cash back credit cards, and how do they work?