How to use cashback credit cards

What is a cashback credit card?

Cashback cards work like any other credit card, but also reward you by paying you back a percentage of what you spend.

For example, if a card paid 3% cashback on all purchases and you bought a new phone for £500, you would earn £15 cashback.

They are similar to rewards credit cards but pay you in cash instead of rewards points or vouchers.

How is cashback paid?

Cashback is usually paid monthly or once a year in the month you originally took out the card. Most credit the amount you have earned to your statement or bank account.

Annual cashback: If you took out a card in November 2023 and earned £150 cashback within a year, you would receive a credit for £150 on your statement in November 2024. This means that if you spent £500 in that month your bill would be reduced to £350.

Monthly cashback is offered on some cards. They will deduct the amount of cashback you have earned from the amount you owe, so if you spent £500 and earned £15 cashback, your bill would be £485.

Some cards let you send the cash to your bank account and others let you convert it into shopping vouchers worth even more. With a deal that offers an extra 5% if you convert to a voucher, you could turn £100 of cashback into a £105 voucher.

Will your cashback be taxed?

No, cashback will not have tax deducted from it.

How to earn cashback

Most of your spending will earn you cashback, whether you buy a coffee or a new TV. All you need to do is make sure you use the card when you pay.

The total cashback you can earn each year is capped on some cards (for example £150 a year), but others do not specify a maximum amount.

The following can affect how much you earn:

Where you use your card

Some cards pay higher cashback rates for certain purchases. For example, a card might pay 0.5% on most spending but pay a higher rate for: 

• Supermarket purchases

• Petrol 

• Train tickets

• Spending with specific retailers

Introductory offers

Some providers offer a higher cash back rate when you first take out the card.

For example, you might earn 5% on any purchases you make during the first three months and then 1.25% afterwards.

There may be a limit on how much you can spend and still earn the higher rate, such as 5% on the first £2,000 you spend but only 1.25% on any purchases above that.

How much you spend each year

Some deals offer different cashback tiers based on how much you spend in total each year. A card could pay you:

• 0.5% cashback if you spend up to £3,500

• 1% on £3,500 to £7,500

• 1.25% on more than £7,500

When will you not earn cashback?

You will usually not earn cashback on:

• Cash withdrawals

• Balance transfers

• Money transfers

• Buying foreign currency

• Mobile phone top ups

• Interest, fees or charges you pay

You will also stop earning cashback if you spend beyond your credit limit, stop making minimum repayments or break any other terms and conditions.

How to maximise your cashback

To earn as much cashback as you can, consider using your credit card for everyday spending, not just one-off bigger purchases. 

If you need to make a large purchase, it might be worth getting a cashback card first, especially if it offers a higher rate in the first few months. If you get a higher cashback rate when you use a particular retailer, shop there as long as it is not more expensive, or less convenient for you.

It’s important, however, not to make unnecessary purchases just to get cashback. Only use your cashback credit card for purchases you would already be making.

Visa, MasterCard or American Express?

American Express's cards often offer the best cashback rates because they charge retailers higher fees, so they can pass some of this money back to you. But, this is also a reason all retailers don't accept American Express cards. 

Here is a closer look at the difference between MasterCard and Visa. When you choose your card, pick whichever offers the best benefits for you.

How much does a cashback credit card cost?

The costs of a cashback card are the same as any other card type:

• Interest is charged on outstanding balances

• A higher rate of interest may apply to cash withdrawals

• Fees and charges for breaking the account's terms e.g. spending over your credit limit

However, you may find that cashback cards are more likely to charge a monthly or annual fee for holding that card, or charge a fee that is higher than standard credit cards. Here is a look at all the costs of a credit card

Should you avoid cards with an annual fee?

Not always. Some cards come with a fee but pay more cashback than cards that are free to use. This means that you could earn a higher amount of cashback even after paying the fee. 

For example, if a card charged a fee of £24 a year and paid cashback at 3%, you would earn £150 if you spent £5,000 in over 12 months. This would come to £126 after deducting the fee. However if you spent £5,000 on a free card that paid 1% cashback, you would only earn £50 cashback.

Should I get a cashback credit card? 

As a rule of thumb, if you don’t or can’t pay your credit card bill off every month, it’s not worth getting a cashback credit card.

This is because you will start having to pay interest on your outstanding balance. Many cashback credit cards charge a higher interest rate than standard credit cards so you can quickly end up out of pocket with a rapidly growing debt.

If you can’t guarantee you can pay your bill off every month, a credit card that offers an interest free period on purchases could work out to be cheaper for you.

Even if you can afford to pay your bill off every month, you still need to be disciplined to ensure your cashback card doesn't end up costing you. Set up a direct debit to pay back the full amount each month to avoid paying interest or being charged a fee for forgetting to pay.

How to get the best cashback credit card

To get the best card, work out which one will pay you the most cashback in total. This may depend on how you plan to use it, taking into account for example how much you are likely to spend on it and whether that will justify any fees. 

The best cashback credit cards will only accept your application if you meet their criteria like earning more than their minimum income amount and having a suitable credit record.

Once you have chosen the card you want, here is how to apply for a credit card.