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With a cashback credit card, providers pay a percentage of the amount spent on the card, back to the card holder. Being paid to spend sounds too good to be true, but that is the purpose of a cashback credit card.

The cash you get back as a card holder can be on an annual basis or on specific purchases. As incentives go, being given some of your money back can be a very alluring reward for borrowing with a particular provider but cashback credit cards aren’t for everyone.

It only ‘pays’ to use these credit cards if you commit to using them in a very responsible and disciplined way. If you’d like to find out if this type of card is for you, then keep on reading.

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How do cashback credit cards work?

  • Earn a percentage of your spend in cashback
  • Often have reward limits
  • For max earnings pay off balance every month

Getting cashback when you spend is a type of reward scheme some lenders use to make their cards more attractive to you. While some cards promise a fixed sum back providing you transfer a balance or use a card within a particular period after opening, this isn’t quite the same as a cashback card where you get back an agreed percentage on the money you spend.

Some cards offer a higher percentage back over the first few months before the rate you receive back levels out a little. Other cards operate on a tiered system whereby you can access a higher percentage of cashback the more you spend. Some providers even offer different cashback percentage rates based on what you’re buying and from whom.

Before your start spending your potential rewards in your head, it’s worth noting that your cashback earnings will be capped on a monthly or annual basis. If all of this has you scratching your head, don’t worry, you’re not alone. As with most financial products, the trick is to do your research and find one that matches both your circumstances and your needs. A little note to remember, no matter which card you go with, is that the money you do receive back will be tax free.

Cashback credit card example

As an example, if you had a three month introductory period rate of 3% cashback and did a weekly supermarket shop of £100, you could earn £36 on just that spending alone. If you use your card in all situations where you’d usually use cash or your debit card – to pay for things like petrol, travel, gifts, your lunch and even your coffee on your morning commute – you’ve got the potential to earn much more.

Cashback rates vary between providers, but after a high introductory rate you could expect your percentage to drop considerably, perhaps to around 1% or 0.5%, the latter of which represents 50p for every £100 spent. This is why you have to be very savvy when it comes to cashback card use.

Clear your balance

Cashback credit cards can work well for those who have little or no debts and are able to clear their full credit card balance each month. While you spend on your credit card, your salary or wages will need to sit untouched in your bank account and you simply use those funds at the end of the month to clear your borrowings in full, knowing that you’ll receive a nice little bonus in the form of your cashback.

You might choose to put the extra cash in a rainy day fund, to save for a holiday or wedding, or even to siphon it off into a savings account towards a house deposit. It can be a great way to add to savings through things that you spend money regularly on. To really make a cashback credit card work for you, you need to follow some golden rules;

  • Always pay in full
  • Never spend more than you would if you weren't using the card
  • Don't go over your credit limit or make late payments

Not only will late payments and limit breaking potentially damage your credit score but it could break the terms and conditions of your reward scheme and lose you your cashback deal too. To ensure you pay in full, set up a direct debit to clear your balance each month and use tools at your disposal such as SMS balance reminders to ensure you never go over your credit limit.

Maximise your earnings

To maximise your earnings you could use your cashback card to pay for work expenses provided it’s within workplace regulations and you can afford to shoulder the cost of making your card payment while you wait for reimbursement. And, if you’re planning a big ticket purchase such as a holiday or new sofa that you’ve been smart enough to save up for, you can use your cashback card to pay for that too then use your savings to clear the balance later.

That way, you’ll net cashback plus consumer protection and all for something you’d be buying anyway. Of course, do be sure to check that any charges levied when paying by card don’t wipe out your cashback earnings. In some cases it will still be worth it as purchases between £100 and £30,000 are protected by Section 75.

Not sure a cashback credit card is for you? Find out more by reading our guides which credit card is best for me or find alternatives to credit cards.

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Compare cashback credit cards

Whenever you’re on the hunt for a new financial product, it pays to do some research and planning first and that’s most definitely the case with a cashback credit card.

Comparing APR is always listed among the must-dos when borrowing. In this case, you’ll want to check what the long term APR on a card is, but if you pay your bill in full and on time every month, you won’t ever need to be charged that interest. The rates tend to be fairly high and therefore if you are paying interest each month, it will cancel out the cashback you’re getting.

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Incentives for cashback cards

With introductory rates, tiered cashback and terms and conditions that can include minimum monthly or annual spends, plus annual or monthly fees for holding cards or charges for dormant accounts, you need to be primed for accurate analysis when you compare cashback credit cards.

Along with doing your sums as to which cards will suit your spending best, you may also want to consider where your card may be accepted. Both Mastercard and Amex cashback credit cards are available with varying rates of cashback offered but Mastercard tends to be accepted in more places, which could impact on your earning potential.

Cashback cards for credit score

If your credit score could use a little work, you’ll be pleased to know that some lenders do offer cashback cards to those who need to improve or build a credit score. These are often called cashback credit builder cards and tend to come with lower cashback rates, so you can compare credit cards for bad credit too. Just bear in mind that you’re better off paying off any debt first as interest on that is likely to outweigh the benefits of spending on a cashback card.

For those planning other big credit applications in the near future such as a change of mortgage or new car, remember that it’s best to space out credit applications. When you’re ready to seek out the card that suits you best, using a soft search through tools like our moneymatcher can help you find something that’s a good fit without leaving a mark on your credit file.

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