Part 1: How Do Cash Back Credit Cards Work?
CASH back credit cards work while you're spend to reward you with cash.
Unlike other reward credit cards which give you points for spending the rewards with cashback are obvious and immediate: cash deposited straight to your account. Often, you can get more cashback from selected shops and services which benefit the credit card provider's parent company.
Cash back is usually calculated as a percentage of your spending every month and added as a credit to your account.
If you never pay interest on your credit card and want a credit card to use for everyday spending then a cash back credit card could be for you.
Like all credit card rewards cash back schemes are meant to motivate you to switch to - and stay with - one credit card provider over another, but that doesn't mean you can't use them to your advantage.
Cash Back Credit Cards
How much cash back will I make?
This depends on the cash back credit card deal you choose to sign up for.
Card issuers vary considerably in what percentage of your spending they offer back as a reward, so it is imperative that if you are interested in a cash back deal, that you shop around and find the best offer available - to compare cash back credit cards is fundamental to getting the best payouts.
Generally the amount you can earn is between 0.5% right up to 5% during bonus periods.
Sometimes the credit card issuer will stipulate favoured retailers - retailers that, if you shop with them, you actually earn a higher percentage of cash back.
Some other terms and conditions may apply, for example earning limits, and it will be worth your while checking the small print on any cash-back offers.
To get a real figure quick - use our cash back earnings calculator, which will let you know how much cash back your spending will make on each of the available cash back credit cards. It's also worth comparing cash back deals against other reward credit cards, such as those that offer points for shopping vouchers, use our rewards calculator if you want to do this.
How much cash back will I earn and what will I earn it on?
Firstly, cash back is only ever earned on purchases - that is goods or services bought from retailers or companies. Cash back is never awarded on cash withdrawals, buying foreign currency or traveller's cheques, gambling transactions or balance transfers. Cash back will also never be awarded on interest, fees or default charges.
Cash back credit cards all offer different schemes set up by their bank or building society. As well as percentages of cash back varying, also which purchases you can earn cash back on - and how much - can also differ between cash back schemes.
There are 3 main types of cash back credit card scheme - flat rate schemes, tiered schemes, and selected retailer schemes. Choosing the right cash back credit card for your spending is fundamental in helping you to earn the most cash back for your money
Flat rate cash back credit card schemes
Flat rate cash back schemes are the simplest schemes; they offer one percentage amount of cash back awarded on all your spending.
For example, with a flat rate cash back credit card you may earn say 1% cash back on all your purchases - so you'll be earning cash back whenever you use your credit card to pay for a purchase.
The benefit of a flat rate cash back credit card is that you can earn cash back on all your spending. The Capital One World MasterCard credit card offers a very decent 1% flat rate cash back scheme, there are no limits to the amount of cash back you can earn, although there is an £18 annual fee - this is slightly offset by the yearly £10 cash back bonus.
Tiered cash back credit card schemes
Tiered cash back schemes offer a certain percentage of cash back on spending up to a certain amount, and then another percentage of cash back on spending above that amount.
There are two types of tiered cash back credit cards; those that offer more cash back on lower levels of spending, and those that offer more cash back on higher levels of spending.
To decide which tiered cash back scheme is best for you, you need to work out how much you spend on average in a year.
Due to the lower amounts of cash back on the lower tier levels, you will need to spend more than £1500 a month to tip the balance in favour of American Express' tiered cash back scheme than earning a flat 1% with Capital One.
Spending in excess of £1500 a month simply adds more and more value to the American Express Platinum cash back scheme.
The only exception to this would be if you're spending a lot in the first few months of opening the account, in which case the American Express Platinum's 5% cash back bonus is always the best deal to go for.
Cash back with selected retailers
Cash back with selected retailers is where a cash back credit card rewards you with cash back when you shop with certain retailers or companies specified by the card.
The benefit of these cash back credit cards is that you can earn huge sums of cash back, sometimes up to 10% of your purchase spend.
The amount of cash back you can earn with these cards is very tempting, but it's important you know which retailers you can earn with, and also that you already shop with them! If you don't shop with them, you would be much better off with a 'cash back on all spending' card.
| Egg credit card |
| Offers various amounts of cash back when shopping online through the Egg Cash Back Store (powered by Quidco), covers over 1,500 online retailers, including: |
- Play.com
- hmv.com
- Tesco.com
- ASDA
- Marks & Spencer
- LoveFilm
- O2
- Debenhams
- Holiday Inn
- Game
|
- Apple Store
- Comet
- The AA
- Thorntons
- Expedia
- Homebase
- Lastminute.com
- B&Q
- and many many more
|
| Barclaycard Freedom |
| Offers up to 1% 'Reward Money' with the following participating retailers: |
- Blue Inc
- Shell
- Goldsmiths
- Yo! Sushi
- Pizza Express
- Firebox.com
- npower
- LA fitness
- Nationwide Autocentre
- gourmet burger kitchen
- Barclays
- Officers Club
|
- Just Tyres
- Flight Centre
- Watches & Switzerland
- F.HINDS
- Mappin & Webb
- petroleum
- BSM
- Bales Brothers
- Lewis & Clarke
- Give by George Davis
- JustGiving
|
Introductory cash back bonuses
A slightly more recent addition to the cash back credit card market is introductory bonuses - or joining incentives. Some cash back credit cards are now offering a much higher percentage of cash back during the first so many months of being a cardholder.
These intro bonuses can be a great way to kick-start your cash back earnings and are perfect if you have a large or several large purchases to make in the near future.
The current best introductory cash back credit card is the...
| American Express Platinum credit card |
Which offers a massive 5% cash back during the first 3 months on spending up to £2,000. After this is a tiered cash back scheme though, so you have to be a high credit card spender to really benefit - the first £3,500 spent a year will only earn 0.5%, but then spending over £3,500 will earn 1% and then 1.25% is earned on spending over £7,501. |
Are there any hidden drawbacks from cash back credit cards?
No, cash back credit cards are invariably as good as other varieties of credit cards. A great many credit cards have one incentive or another to attract customers, and cash back is just another example.
As per usual, you will have to examine each offer on its own merits, but a cash back credit card will not have any more unfavourable conditions attached than any other family of credit cards. And you can use it just as you would, and in the same places as, any other credit card.
Remember to watch out for...
- Not paying off your balance in full every month - Paying interest on your credit card balance will cancel out the benefit of the cash you get in credit card rewards.
- Making transactions that aren't purchases - Gambling transactions, cash withdrawals and getting cashback at the till when you make a purchase all count as cash transactions rather than purchases so you won't get cash back on them and you will be charged interest from the day of the transaction and handling fees too.
- Poor credit history - You'll need a good credit history to get a cash back credit card.
How can I maximise my cash back earnings?
This is the wrong question to ask! The simple answer, of course, is that you maximise cash back by spending more on your credit card. But while you get back maybe one pound in a hundred, you will still have to pay off the other £99, potentially with interest.
Essential purchases are ideal for a cash back credit card, and viewed in this context such offers can be a genuine money saver.
The weekly grocery shop is a great example of this. Suppose you usually pay for your weekly jaunt around Tesco's with a debit card. Prudent and sensible, yes?
Not entirely - a cash back credit card would actually bring the bill down, used properly, because you get a proportion of what you spend back, in cash, at a future stage. So if you keep up to date with your balance and pay it off regularly, cash back credit card deals can be great for your supermarket shop.
The same applies to utility bills, petrol, and other essential buys. Look at it as a reverse VAT, where you actually make a cut out of your spending for a change.
Just make sure to pay off the balance whenever your statement is due, or you will defeat the whole purpose.
Cash back bonuses
Some cash back credit cards offer introductory bonuses, offering a higher percentage of cash back for new users for a short period of time.
Again, this gives you the opportunity to be clever and save a few quid. If you have a number of big bills coming up which you can pay by credit card, if you're getting married or are booking a holiday package, then now's the time to flash the plastic!
How and when will I get my cash back?
Sometimes the credit card company will pay you by cheque, sometimes they will simply pay it into your credit card account. Time periods for payment vary - some companies pay monthly, others give cash back quarterly or yearly.
What's the catch?
There is none! Cash back deals are fantastic for unavoidable, essential purchases.
Better than cash, in fact, if you use them correctly. And they are one of the very best credit card deals you can get. They won't cost you any more in charges than other credit cards, and can be used just the same as any other credit card.
But it's easy to forget that the interest rates charged on any card will always outweigh the potential money saving benefits. So you should be as wary of using cash back credit cards on profligate, unnecessary items, as you would be with other credit cards.
If you are a diligent credit re-payer and always stick within your credit limit – as well as your repayment budget – then a cash back credit card could be more than worth the 5 or 10 minutes it will take to apply for one.
If, on the other hand you have a tendency to comfort yourself with new shoes or gain stress relief from a new Black and Decker power tool - you may save yourself more money by opting for a low interest rate credit card or a 0% purchase credit card deal.
For more on what to look out for in a cash back credit card see our how to compare cash back credit cards section. For how to start using, and earning, with a cash back credit card see our how to use cash back credit cards section.
Part 2: 