Cash back math, in short
Cash back is just purchase amount times reward rate — a $500 purchase at 2% earns $10, dropping your net cost to $490. The math is simple; the catch is that it only pays off if you pay your statement in full. Carry that same $500 for a single month at a typical 24% card APR and the interest alone runs about $10 — exactly wiping out a 2% reward.
Key takeaways
- A $500 purchase at 2% cash back earns $10, for a net cost of $490.
- The same purchase on a 5% category card earns $25 — more than double a flat 2% card, and over three times a 1.5% flat-rate card's $7.50.
- Carrying that $500 for just one month at a typical 24% APR generates about $10 in interest — the same amount a 2% card would have paid back, canceling the reward completely.
- Cash back is usually credited after the fact — as a statement credit, deposit, or points — not an instant discount at checkout, unless your card specifically offers real-time redemption.
How cash back and net cost are calculated
Two numbers, one formula each:
Cash back = Purchase amount × rate = $500 × 2% = $10
Net cost = Purchase amount − cash back = $500 − $10 = $490
That $10 isn't a discount at checkout — you still pay the full $500 upfront. Net cost is a way of expressing what the purchase effectively cost you once the reward eventually lands.
Why carrying a balance erases the reward
Cash back rates run 1-5%. Credit card interest rates commonly run 20-25% APR. Carry that same $500 purchase for just one month at a typical 24% APR and the interest charge comes to about $10 — the exact amount a 2% card would pay you back. One month of carried balance, and the reward you "earned" is gone, replaced by a wash at best. Carry it longer, or at a higher rate, and you're paying to have used the card at all.
Flat rate vs. category bonus cards
A flat-rate card pays the same percentage on everything — simple, but it leaves money on the table for concentrated spending. A category card paying 5% on groceries versus a flat 1.5% card turns the same $500 grocery run into $25 back instead of $7.50 — more than triple, just from matching the rate to where you actually spend. The trade-off is that category cards usually cap the bonus rate at a quarterly spending limit and drop to a lower flat rate everywhere else, so the best card often depends on matching your specific spending pattern rather than picking the single highest advertised rate.
Related calculators
To see how card interest actually accumulates on a carried balance, see the credit card calculator and credit card payoff calculator. For sales and coupon math on the purchase side, the discount calculator covers that separately.