Cashback Credit Cards
Everything you need to know about cashback credit cards
Being paid to spend, that sounds like the kind of wish only a genie in a bottle – or perhaps a mysterious Money Guru – could grant, doesn’t it?
What is a cashback credit card?
Cashback credit cards reward you by giving you a percentage of the money you’ve spent on purchases using that card. The percentage you receive varies from card to card and only applies to qualifying purchases.
As incentives go, cashback 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 make some money back as you spend, behold, we shall reveal the sorcery behind cashback credit cards….
How do cashback credit cards work?
Cashback cards work by giving you a percentage of the money you’ve spent on the card back. So, if your card pays 1% on all the purchases you make and you spend £10,000 in a year, then you could receive £100 cashback.
How is cashback paid?
Cashback is usually paid annually, in the month that you first started the card although there are some cards that offer the cashback on a monthly basis. Most lenders credit the amount you have earned to your statement, so if you had earned £100 and your bill was £1000, your bill would be reduced to £900.
Some cards will let you send the cash to your bank account or convert it into shopping vouchers, but you’d need to be fully aware of the terms and conditions of your card before you sign up, to make sure you get a deal that is useful to you.
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. With this type of card, potentially, the more you spend, the more you can earn. So it’s ideal for you if you make regular spends on a credit card and so could be earning cashback for purchases you would be making anyway.
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 who.
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 and reiterating: how do cashback cards work? The truth is there are a few figures you’ll need to take into account when you’re trying to get a grip on how much money you may end up with, but what you do receive 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.
Who should use a cashback credit card
Cashback credit cards can work well for those who don’t have any 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 mount up in your bank account and you simply use those 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.
Cashback credit cards are not for people with poor credit. As they are designed to be used for everyday items, you will need to have a credit rating that shows you will be able to pay the balance of the card regularly.
Choosing to apply for a cashback credit card is not a decision to be taken lightly. It’s easy to get into debt easily as you are encouraged to spend more in order to save more. You should only apply for a cashback credit card if you are good at managing your repayments and confident that you can repay, in full, every month.
Although you don’t receive cash in hand, you are making savings, so the cash you use to pay your credit card bill will be less. With the money you save, you might choose to have 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. To 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, and don’t go over your credit limit or make late payments.
Factoring in your fees
Some cards charge an annual or monthly fee. It’s important you factor these fees in before deciding whether or not to apply for a cashback credit card.
How to get the most from your cashback credit card
Before applying for a cashback credit card, it’s important you understand these rules to get the most out of your card and maximise your earnings.
Pay in full every month with a direct debit
Lenders make their money from credit cards on the interest you pay. With a cashback credit card, the interest you pay could be more than the cashback you earn.
Therefore, the savvy way to use cashback cards is to make sure you don’t pay any interest. That way, your earnings from cashback are all profit.
The easiest way to do this is to set up a direct debit to pay off your balance in full every month.
No 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.
Use your card to pay for work expenses
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.
Use it for big ticket items you’ve already saved for
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 for paying by card don’t wipe out your cashback earnings. If this is the case, you may still want to pay a small deposit on your card to activate Section 75 protection on purchases between £100 and £30,000.
Make sure you have cleared your debts and have a good credit rating.
Use it for your regular spending
Just because you get cashback doesn’t mean you should go mad and purchase items you otherwise wouldn’t. But, by using your cashback card for normal purchases that you would otherwise use cash/debit cards for, you can maximise your earnings.
The key to this is discipline. Don’t be tempted to buy things just because of the allure of cashback. If you wouldn’t normally purchase it, then don’t. Like any good Guru, it pays to be wise with your spending decisions.
Don’t borrow money or withdraw cash
Withdrawing cash on cashback cards can often result in you being charged a fee. So you should never use these cards for that purpose. You can even be charged interest if you then pay off the cards in full.
If you need to borrow money, it’s unlikely cashback cards are for you. In this case, you’d be better looking either to balance transfer cards or 0% credit cards, also known as interest free cards.
How to compare cashback credit scores
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 APR on a card is, but only as a warning that you never want to pay it. The rates tend to be high and therefore won’t be balanced by that lovely shopping rebate you’re looking forward to. Of course, lenders hope that by getting you to reach for this particular card habitually you’ll start to pay interest on the card, so stay smart.
Cashback credit cards may offer different rates depending on where you make your purchases. For example, you may gain a greater percentage of cashback from money spent at a supermarket than you do in a clothing shop. Similarly, the rate of cashback may increase the more you spend. It’s important to factor both of these facts into your decision making before choosing a cashback credit card.
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 a 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 Money Matcher can help you find something that’s a good fit without leaving a mark on your credit file. That’s some splendid sorcery…
Updated on 2nd October 2018