Used in the right way, cashback credit cards can be a great way to make money on your everyday spending but they aren't for everyone. We show you how to avoid the pitfalls and make cashback credit cards work for you.
What are they?
Cashback credit cards are a form of credit card that reward you for spending on them, by paying you back a percentage of what you spend.
Most cashback credit cards pay you between 0.5% and 5% of any purchases you make. So for example if you spent £500 on your credit card over the course of a month you’d get £25 cashback at the 5% rate.
Although this doesn’t sound like much, the cashback can quickly add up if you use your card for all your purchases. You’ll generally be paid any cashback you’ve built up annually, which will appear as a credit on your statement.
In this way if you go for one of the top-paying cashback credit cards you could be earning up to £5 back for every £100 you spend.
Who would they suit?
It’s worth mentioning that using a cashback credit card for your spending is only a suitable option for those who know they can pay off the balance in full each month. This requires a certain amount of discipline, as well as the necessary funds to cover your whole outstanding balance every month, so this means that cashback cards are not the perfect option for everyone.
If you think you may not be able to pay off the balance in full every month you may be better off going for a credit card that offers low rates on purchases, or a 0% introductory rate on purchases (but after the introductory period ends you may want to transfer your balance elsewhere).
How can I use them to my advantage?
Always pay off your outstanding balance
The most important thing to remember when it comes to cashback credit cards is that you must pay off your balance in full every month without fail. If you forget to do so, or can only afford to pay back a fraction of the outstanding amount, you will be landed with hefty interest payments which are likely to far outweigh any return you can make through the cashback scheme.
Therefore the only way to really make a cashback credit card work for you is to make purchases on your card over the course of a month, but then pay off the balance in full as soon as you receive your statement, so that no interest is added to it.
Interest rates on cashback credit cards tend to be higher than standard credit cards, so if you allow interest to be added to your balance you will be completely cancelling out the benefit of any cashback earned. If you usually carry balances from month to month then opting for a card that offers cheap rates on purchases is probably going to be more suitable for you.
To make sure you never fall into the trap of forgetting to pay off the balance and allowing it to accrue interest, the best thing to do is to set up a direct debit from your current account to your cashback credit card account. This will ensure that the full outstanding amount on your credit card account will be automatically paid off by funds in your current account every month. This is especially useful if you’re particularly prone to forgetting to pay off credit card balances, or if you think you might be tempted to only pay back part of the balance.
To set up a direct debit simply ask your bank for the correct forms. Make sure to specify that you want your balance paid off in full on the form so that however much is outstanding for any one month, it will always be taken care of by your direct debit mandate. Remember however that you will have to make sure you always have enough funds in your current account to cover this regular outgoing.
Use them for all spending
If you want to maximise the potential of your cashback credit card, the best thing to do is to use them for as much spending as you can. This doesn’t mean that you should spend more than you usually would; splashing out on a thousand-pound shopping spree just to get £50 back in cashback would obviously defeat the object.
Instead, use the card for all your usual day-to-day spending, whether that’s supermarket shopping, buying some new clothes, or buying pet food. Make your cashback credit card your new currency as far as it is possible to do, so that all the money you would usually spend is added to your outstanding credit card balance.
However you will need to make sure that the money you intend to use to pay for these purchases is kept safe over the month, ready to be used to pay off the balance when your statement arrives. Keeping the necessary amount safe in a high-interest current account is a good idea – or, if you think you might succumb to temptation, stash it in a high-interest savings account and move it back before your direct debit is due. You can even set this up to be moved to your current account automatically in time for the direct debt, if you think you might forget.
It’s also a good idea to use your cashback credit card for larger purchases; for example to pay for your holiday, or the LCD TV you were planning on buying your mum for Christmas. If you were going to make this purchase anyway, pay for it on a card that will give you a percentage of that purchase back.
In this way it’s worthwhile planning in advance the bigger purchases you intend to make, and applying for your cashback credit card ahead of time so that you have it ready to use when the time comes. Just make sure that you pay off the balance each month in full to avoid accruing interest. If you go for a cashback credit card that has an elevated cashback introductory rate, and time your application so that you’re within the introductory period when you make your big purchase, you’ll get even more back.
Go for a joint cashback credit card
It is possible to make even more money from your cashback credit card if you apply for a joint card with your partner. In this way both you and your designated secondary card-holder can spend on the account, totting up the balance even further and earning even more cashback. However do remember that there are implications in linking your finances with a partner, as your credit histories will reflect on each other.
Cashback credit cards often come with introductory rates, offering as much as 5% cashback for the first 3 months and then up to 1.5% thereafter, for example. So if you want to really make the most of your card, you and your secondary card-holder could use the card for 3 months, both earning up to 5% cashback and paying off the balance each month.
Then, after the 5% introductory rate drops, your secondary card holder could apply for their own card at the introductory rate, making you the secondary card-holder and repeating the exercise so you effectively get to enjoy 6 months cashback at the introductory rate. As long as you do this with someone you can trust, it can be a good way to make as much cashback as you can from these cards. It may be a good idea for you both to agree on the amount you can spend up to per month.
What’s the catch of using a cashback credit card?
High interest rates
Of course the biggest catch of using a cashback credit card for spending is the higher-than-average interest rate most cards of this variety carry. If you spend, spend, spend on a cashback credit card but then leave the balance to sit there, only making minimum repayments each month, the interest accrued will cost you much more than it’s possible to earn back on the card.
But as this can be easily solved, it doesn’t present much of a problem – just make sure that you pay your balance off in full every month and you’ll never have to pay any interest at all. If you think you won’t be able to do this however, cashback cards aren’t likely to be suitable for you, and you might want to try a card that offers cheap rates on purchases instead.
Never use them to withdraw cash
It’s also worth remembering that you should never use your cashback credit card for withdrawing cash. This will normally cost a substantial amount, and not only that, it also means that you’ll be charged interest for the privilege even if you do pay off the balance. So use your cashback credit card for spending only, and withdraw cash from elsewhere (i.e. an account such as your current account which won’t charge you for doing so).
Don’t use them for a balance transfer
One last thing to remember is that cashback credit cards aren’t usually a suitable option for a balance transfer. They often offer very competitive balance transfer deals but this is to tempt you to move your existing credit card debts to them.
However it’s advisable not to do so because of the ‘negative order of payment’ which basically means any payments you make towards paying off your balance will go to your cheapest debts (those earning the least interest) first, leaving the more expensive debt to accrue interest at a dizzying rate. So it’s worth keeping your cashback credit card simply for spending, and leaving your credit card debt on an interest-free or life-of-balance transfer card.
So, if you can be disciplined to pay off your balance every month, cashback credit cards can be a great way to earn a little back on what you spend – and can actually reward you for spending on the card rather than charging you for it.
