We explain how cashback credit cards work, what the advantages are and what to look out for.
Cashback credit cards pay you a small amount of cash (usually paid annually or monthly) every time you spend on them. The amount you get back is a percentage of what you’ve spent, for example if your card pays 1.5% cashback and you spend £100, you’ll earn £1.50.
While there are obvious advantages to earning cash on the money you spend on your credit card, there are a few factors you should consider before deciding that a cashback credit card is right for you.
What’s the advantage of using one of these cards?
The main advantage of these cards is the cash reward. The money you receive is tax free, and cash is more flexible than other rewards such as bonus points or air miles.
Who are these cards for?
If you pay your credit card bills in full every month, then cashback cards could be for you. With regular full-balance repayments, they allow you to earn cash rewards on money you would have been spending anyway.
However, if you carry a balance over from month to month, cashback cards may not be the best choice. The interest you’ll be charged will usually be more than any cashback you’ll earn.
What should I be aware of?
- If you rarely use your credit card for regular spending, it’s unlikely you will earn a great deal of cashback on these cards. Don’t be tempted to increase your credit card spending just to earn cashback.
- If you don’t pay your balance in full every month, you’ll be hit by interest rates that could outweigh any cashback you’ve earned. By setting up direct debits to pay your balance off in full every month, you’ll avoid any interest. (If the providers omit the ‘pay in full’ option from the direct debit form, just write ‘pay off in full’ yourself).
- If you exceed the credit limit you may be hit with charges. Many cashback credit cards also charge annual fees, which could be up to £140.
- Some cashback cards pay a flat rate of cashback, whereas others pay you a higher percentage if you spend more. Some cards offer varying rates depending on where you spend, for example at a supermarket or on fuel. It’s a good idea to consider how often you use your credit card at these specific places.
How likely am I to be approved?
This will depend on the individual lender’s criteria and your credit report.
In the 'Offers' section of your ClearScore account you can see your eligibility rating for a list of credit cards chosen for your credit profile, which can help take the guesswork out of applying.