Cashback credit cards

There are varying rates on offer in the UK cashback market today, and an array of introductory bonuses to tempt even those who consider themselves the most financially responsible.. Furthermore, some have an annual fee, some have spend limits, and most have a higher APR than other credit cards.

So how do you go about choosing a cashback credit card? How can you be sure that cashback cards are right for you? And what stipulations should you be aware of?

What is cashback?

Cashback is where you buy something and get a percentage of the cost paid back to you. Essentially, cashback is a way of getting money off things you buy. You can get cashback on a credit card, but some current accounts offer it too.

Some providers either offer cashback on everything you buy, or specific things like fuel or bills.

How can you get cashback from a credit card?

Cashback cards, like most reward cards, are only offered to those with a near-perfect credit history. Prior to applying for such a card it’s advisable to check your credit rating with one of the three credit reference agencies (Experian, Equifax or CallCredit) to ensure that all of your information is correct and that your credit history has no blemishes*. If you apply for a credit card and are declined, this will leave a ‘footprint’ on your credit history that may make it more difficult to access other forms of credit in the future – at least for a while.

Once you have ascertained that your credit history is probably good enough, applying for a cashback card is easy and can be completed online by filling out a simple application form.

*Due to coronavirus financial worries, some lenders have tightened their acceptance criteria. It’s certainly worth doing an eligibility checker before applying.

Is a cashback card right for you?

Apart from the excellent credit history required, the only way that cashback cards really work in a financial sense is if you pay off your balance in full and on time every month*. If you don’t, the interest rates and charges you will incur will likely far outweigh any cashback you will earn. It is best to set up a direct debit with your bank to pay off the card balance in full every month.

Before applying for a cashback card it is best to sit down and calculate your normal monthly spend on your credit card, both in terms of the amount you spend and where you spend it. Once you have that information, take a look at the cashback cards on offer and check which one would net you the largest returns, both in the short and the long term – and incorporating the annual fee if there is one.

*Due to COVID-19, you can now ask for a “payment holiday” and won’t have to pay minimum payments on your card for up to 6 months.

Which cashback card should I choose?

Every cashback card is different in what they offer, and will suit different people depending on their spending habits. Here are some variables you should look out for:

  • Introductory cashback rates – Many cashback credit card issuers offer an introductory rate, generally for a minimum spend and for a specific amount of time. These can be great if you are planning a large purchase or several purchases immediately, but if you are unlikely to reach the spend limit in the given time, you should only check out the standard rate of cashback.

  • Standard cashback rates – This is the amount of cashback earned after any introductory period has ended.

  • Higher APR – Many cashback cards tend to have a higher APR. This should be taken into account, as it is the rate you are liable for if you are unable to pay off your balance in full in any given month.

  • Annual fee – Any annual fee should be taken into account when calculating how much cashback you will earn.

  • Cashback limits – Some cards impose a maximum amount of cashback that can be earned in any given year. If, according to your calculations, you are likely to exceed this amount, it may be worth working out whether a card with unlimited cashback is more suitable.

  • Minimum spend – Some cashback cards stipulate a minimum spend on the card before a specific rate of cashback is earned.

  • Retail specific cashback – Some issuers stipulate where you can earn different rates of cashback, for example in specific stores or on specific products. For example, 1% at a named supermarket, but only 0.5% everywhere else, or 1% at all supermarket stores and 0.5% at their petrol stations. It is important to consider where you normally use your credit card and on what, and choose your cashback card accordingly.

Cashback card caveats

There are some golden rules to obey with cashback cards, and indeed all reward cards.

  • Always pay off your balance in full every month – that way you can keep every penny earned from cashback.

  • Never use your cashback card to withdraw cash – there is often a big fee charged for this, the APR on cash withdrawals is even higher than the standard APR, and the interest is charged immediately.

  • Never be tempted to overspend on your card, simply to increase your cashback – unless of course you can guarantee that you can pay off your balance every month.

Used sensibly, cashback cards can prove to be a lucrative way of earning extra cash on your normal credit card use. Choose your card carefully, spend wisely, always pay off your balance, and then sit back and let the money roll in!

Cashback credit cards and COVID-19

The coronavirus outbreak is affecting everyone around the world and has put a financial strain on many. If you currently have a cashback credit card and are struggling to meet your minimum payments, help is at hand.

Measures have been introduced by the Financial Conduct Authority (FCA) that allow you to request a freeze on credit card repayments. This is to give those experiencing a change in financial circumstances due to COVID-19 some breathing space. This won’t leave a bad mark on your credit history due to the exceptional circumstances. 

You can apply for a 3-month payment holiday, which can be ‘topped up’ to a total of 6 months; you have until 31 March 2021 to request your payment holiday. Make sure you’ve agreed to it with your lender before you stop paying!

If you can afford to make repayments it’s best to do so, as you will still be charged interest during this holiday period. You might end up paying more in the long run so only request it if you really need it.

Cashback credit card FAQ

How much cashback could I earn?

This will depend on a few factors, including how much you spend on your credit card in any given month, and where you spend it (some cards award different cashback rates depending on where or what you spend your money on). Furthermore, some credit cards offer an enhanced rate only for a limited period when you take out the card. One way to enhance your cashback is to use your credit card for all your normal monthly outgoings, including the payments you would typically use a debit card for. Just remember that you must pay off your credit card balance in full every month, otherwise your interest payments will easily eat away your cashback earnings.

Why is the APR so high on cashback cards?

Credit card issuers need to make money, and to offer such tempting cashback schemes, they charge a higher APR. If you always pay off your balance in full every month, you will not be charged any interest at all, so this won’t be an issue. But if you do end up with a balance rolling over to the next month, be aware that the interest will probably be higher than other forms of credit.

What are the common pitfalls with a cashback card?

  • Choosing the wrong card. The advertised leading rates can be distracting when trying to choose a cashback card. Before you opt for the ‘5% for three months’ deal, it is important that you apply the different rates on your own average credit card spend. For example, if the majority of your monthly credit card spend is on fuel and supermarket shopping, it wouldn’t be a savvy move to opt for a card that offers a low cashback rate for such transactions, but a higher rate at shops you never visit. Before you apply for a cashback card, work out how much you would receive in an average month, and choose the card that offers the most for you personally.

  • Overspending. With attractive introductory rates or enhanced limited offers, it can be tempting to overspend on your cashback credit card. Don’t forget: your debts must always be paid, and if you don’t pay your balance off in full every month, you will be subject to the higher APR they charge.

  • Not spending enough. If your spending habits and the cashback you earn do not even cover the monthly fee you are charged, a cashback card might not be right for you and you may be better served with another card.

Can I use my cashback card abroad?

Yes: your cashback card works just like a normal credit card. However, before you travel, you should look at the foreign transaction fee and foreign ATM withdrawal fee for your cashback card. It’s worth noting that very few cards will award cashback for overseas purchases, too.

8 February 2021