Cashback credit cards can be a great way to get something for nothing when you shop.
What are cashback credit cards?
Cashback cards are a type of reward credit card. But, instead of offering points that users can exchange for benefits, cashback cards offer cardholders a percentage of the value of their transactions back as cash. The rate at which money is returned differs from card to card, but the basic concept is common to them all.
How do cashback cards work?
As far as the cardholder is concerned, all they have to do is to spend with their cashback card. The money they've earned is then automatically credited to their account.
The reason that cashback credit cards can offer money back to consumers is mainly due to 'interchange'. Interchange is the percentage of the value of a transaction that payment processors (American Express, Mastercard, Visa, etc.) charge merchants for processing their transactions, and it funds most credit card reward programs. Interchange fees differ for credit and debit cards, with credit cards transactions being permitted to charge more, with 0.3% of the value of the sale the highest level possible.
Which cashback card is best?
The best cashback card is clearly the one that enables you to earn the most money back. However, cards structure their rewards in a variety of ways, so getting the right product for your particular circumstances is essential to maximising your return.
If you don't tend to use your credit card day-to-day, but you know you have a big purchase to make shortly, the ongoing cashback rate may be of little concern to you. A high introductory cashback rate will be of far greater value to you for short term use.
Equally, if you spend a steady amount month-on-month, a card that pays good ongoing cashback, without caps on what you can earn, may deliver a considerably better long-term return, than a card which quickly drops to lower cashback level once the promotional rate has expired.
Some cashback cards offer higher cashback rates for particular purchase categories (eg. Supermarket or fuel). So, to ensure you get the best product for your needs, you really need to have a good understanding of where you're likely to use your card. If the majority of your spend is with supermarkets, then an advantageous return with them may more than offset poorer levels of cashback elsewhere. Equally, if you're using your card to manage the business expenses you can claim back, a card offering better average rates of return might be more suitable.
Annual fee conundrum
You will also need to consider whether it is worth paying an annual fee. Fee-free cashback cards are available, but annual fees are not uncommon. Both free and paid cards have advantages; free cards cost nothing to acquire, while paid cards offer higher levels of cashback. Which is right for you will depend on how much you spend - Annual fee charging cards can quickly pay for themselves if you spend a great deal on your card.
Payment processor problems
Although more widely accepted in the UK than ever before, American Express, who issue some of the most generous UK cashback products, still lags behind Mastercard and Visa in terms of acceptance. Obviously, you can't get cashback if you cannot use your card, so, if you're thinking about getting an Amex product, check that the places you shop accept their cards. Many do, including all the major supermarkets, but a number of smaller businesses and some of the big DIY stores do not accept Amex payments.
What other benefits do cashback cards offer?
The primary motivator for people seeking cashback products is the money they can receive back on shopping that would otherwise go unrewarded. However, some cards also offer additional features which can make having a card doubly rewarding. These features vary from card-to-card, but can include:
Some cashback cards offer purchase discounts to their holders. These discounts are sometimes restricted to brands linked to the card, and are designed to build and foster loyalty to a particular group. In other instances, card issuers offer ad-hoc discounts for purchases where no brand connection exists. A good example of this is 'Amex Offers'. These deals, available to American Express cardholders, change monthly and give cardholders discounts on various products and services, including legal care, restaurants, travel, tickets to shows, and retailers.
Fee Free Foreign Transactions
Although unusual, some cashback cards offer fee free foreign transactions. Most credit and debit cards charge a non-sterling transaction fee for purchases made in foreign currencies of around 3%. Therefore, every time you use your card abroad you’re going to pay an extra 3%. Avoiding these fees can make these credit cards amongst the cheapest ways to pay for things while you’re abroad. Of course, you still avoid using them at ATM, because although you won’t be charged the foreign transaction fee, you’ll still start paying interest on the cash advance from the moment you take it.
Is a cashback card right for me?
It depends on how you use your current credit card, or how you might expect to use your cashback card. If you use (or plan to use) your card regularly and always clear your monthly balance, then a cashback card could be a useful way to get 'something for nothing'. However, if you usually struggle to pay your full monthly balance, then a cashback card is likely to be a bad option. The levels of cashback you can earn are still small, relative to the interest charges you are likely to accrue, so, a cashback card is likely to cost more than the value of the benefit it offers you. A good alternative might be a 0% purchase card, which will not charge purchase interest (so long as you make your monthly payments) and might also offer points-based rewards.
Will I be accepted for a cashback card?
Cashback cards were traditionally targeted to people with above average credit ratings. However, in recent years certain bad credit issuers have also started offering cash reward products to those with poorer credit scores. As a result, cashback products are more readily available than ever before. This does not mean you'll necessarily qualify for a cashback product, as you'll still need to meet the card issuers eligibility requirements and undertake a credit check, but it has improved the chances for many people.
To ensure you maximise your chance of a successful application, you should check your credit file with at least one of the UK credit reference agencies. Applications are rejected for a variety of different reasons, but, with your credit file, you should be able to identify areas that might concern lenders before application. You can then make efforts to remedy issues before you apply. Declined applications are noted in your credit file and are detrimental to your chances of securing alternative credit.
Are there alternatives to cashback cards?
There are many different types of credit card available to UK consumers, and they are all suited to different circumstances.
Reward credit cards offer the cardholder the opportunity to earn points that can be exchanged for rewards within the scheme.
Air mile cards are a particular type of reward card that can deliver rewards with a high monetary value - if used wisely.
Charge cards, which do not give their users the opportunity to roll part of their balance on, offer very generous reward programs, as well as other perks, like Airport lounge access.
Different cashback cards return money earned in different ways and at different intervals. Usually, cashback is credited back to the credit card account on an annual basis and applied as a credit against the cardholder's balance.
At present, HRMC does not tax cashback received from cashback credit cards, and it is unlikely they ever will. Taxing credit card cashback would probably necessitate the inclusion of money receive from cashback websites (Quidco and Topcashback) in taxable income and would be a very unpopular move against people demonstrating shrewd money management.
In most instances, you will forfeit your cashback if you close your account, as it tends to be paid out on the month after you've had the card for a year. This means if you have a fee-free product you'll need to keep it open for a minimum of 13 months to benefit from cashback, but, it also creates something of a dilemma for people using cards which charge an annual fee. You'll need to pay a minimum of 2 years annual fees to get your first years' cashback. Admittedly, fee charging cards do tend to offer higher cashback caps for the introductory period which cover the annual fee charge for the second year, but on face value, so they can look more generous than they are.
Yes. Credit card cashback is funded from an entirely different source from the cashback that can be earned using cashback websites. Use them in tandem can give yourself the best possible opportunity to earn cashback on purchases.