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How to use cashback credit cards

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Written by Dan Base, Financial Content Writer

29 January 2019

If you pay off your credit card every month you could make a profit on your spending with a cashback card. Here is how to pick a card and maximise what you earn.

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 once a year in the anniversary month of when you took out the card. Most credit the amount you have earned to your statement.

Annual cashback: If you took out a card in June 2016 and earned £150 cashback within a year, you would receive a credit for £150 on your statement in June 2017. If you then spent £500 in June 2017, 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. Unlike the interest paid on your savings, 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 car. 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 per 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 higher rates on things like:

  • Supermarket purchases

  • Buying petrol

  • Paying for travel, such as train tickets

  • Buying things from specific high street shops and online stores

Some cards also offer higher cashback rates when you pay with contactless.

Introductory offers

Some providers offer a higher cashback 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:

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

Always pay on your cashback card if the retailer will let you, as long they will not charge a fee for using a credit card.

However, if there is a fee and it comes to less than the cashback you would earn, it could still be worth using your card.

Get a cashback card before you make a large purchase. You could get a card that offers a higher cashback rate in its first few months and get as much cashback as possible.

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.

Visa, MasterCard or American Express?

American Express's cards often offer the best cashback rates because they charge retailers higher fees, so can pass some of this money onto 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.

How much does a cashback credit card cost?

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

  • Interest charged on outstanding balances

  • Annual or monthly fees for holding the card

  • Fees for using the card to withdraw cash

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

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. You could earn a high amount of cashback even after paying the fee. For example, if a card charged a fee of £24 and paid cashback at 3%, you would earn £150 if you spent £5,000 in a year. This would come to £126 after deducting the fee. If you spent £5,000 on a free card that paid 1% cashback, you would earn just £50.

Make a profit, not a loss

Fees and interest can eat into the amount of cashback you make or even exceed it, meaning you would make a loss on the card.

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. This guide explains how to set this up and how to manage you card so you avoid fees and getting into debt.

If you will not be able to pay the full balance off each month, the interest you pay is likely to cancel out your cashback because these cards often come with higher interest rates than normal credit cards.

  1. Calculate how much cashback you might earn on the card

  2. Compare this to how much you are likely to pay in annual fees, interest and charges

If the cashback comes to less than the cost, a cashback card is not worth it.

A credit card that offers an interest free period on purchases could work out cheaper for you.

How to get a cashback credit card

To get the best card, work out which one that will pay you the most cashback in total, which will depend on how you plan to use it:

  • If you are likely to buy something expensive soon, a card with a high introductory cashback rate could earn you the most money, such as one that pays 5% for three months and then 1.25% after that.

  • If you want to use the card to spend regularly over the next year or more, a card with a higher long term cashback rate could suit you better, like one that pays 3% for the whole year.

You can compare every cashback credit card here to choose the one that would pay you the most cashback based on what you are likely to spend.

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. Find out which cashback cards are most likely to accept you using our eligibility checker.

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

Find the best credit card for you, whether you're looking for 0% card for balance transfers or purchases or day to day spending and rewards

Compare credit cards

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  • Can you withdraw cash from a credit card?
  • How to choose a credit card that suits you
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  • How to use a credit card for interest free purchases