Cashback credit cards offer you the chance to earn cash from the money you spend, by paying you a percentage back or giving you reward points.
How cashback credit cards work
If a credit card pays 1% cashback on all purchases, you could earn $50 if your annual spend is $5,000. But make sure you pay your balance off in full each month, otherwise the interest charges could outweigh the benefits.
Each time you use the card, you earn a percentage of your spend back in the form of cashback.
So for example if your card pays 2% cashback and you spend $100 in a shop, you will earn $2.
This cashback is generally paid annually, though some cards will pay you your cashback on a monthly basis.
Reward points can normally be exchanged at any point once you have enough to qualify for a ‘reward’.
Cashback cards come in various ways:
Some will simply pay a flat rate of cashback, no matter how much you spend or where you spend it.
Others pay tiered rates of cashback depending on how much you spend. For example, 0.5% if you spend less than $6,000 annually, 1% if you spend more than that. Be careful this doesn’t tempt you to spend more than you can afford to repay comfortably.
Some cards offer different rates of cashback depending on where you spend your money. So for example, 1% on money spent in supermarkets, 2% on money spent in department stores and 3% on money spent on fuel.
When cashback cards are a good idea
If you pay your credit card bill off in full every month then cashback credit cards can be a great idea.
You are getting rewarded for spending money that you would have spent anyway.
If you do not always pay off your credit card bill in full, then cashback credit cards are not such a good choice.
While you will earn cashback on your spending, this will usually be less than the interest charged on your outstanding debt.
Don’t get bamboozled
Card providers might attempt to convince you to take out a cashback credit card by coming up with all sorts of scenarios where you will earn a small fortune in cashback.
For example, they might use your spending on fuel or lunch at work to boost your total spend, and therefore the cashback you could earn, from the card.
However, if you normally pay for these things by debit card or cash, and don’t intend to change that behaviour.
If you’re not comfortable paying by credit card for these things or you worry about getting into debt, you should avoid taking out a card.
If you have a cashback card, don’t be tempted to spend more just to earn cashback or reward points.
Another thing to bear in mind before taking out a cashback credit card is that you might have to pay an annual or monthly fee for the card.
These usually range from a few pounds a month up to $25 a year paid annually for some cards.
Factor this fee in. If you only do a little spending on your card each month and don’t want to increase that spending, then it might be that any cashback you would have earned will be wiped out by the fee.
Your spending habits
If you want to earn the most cashback possible, it can make sense to put all of the spending you usually do each month onto your credit card.
However, you shouldn’t see this as an excuse to spend more than you usually would, simply to earn more cashback.
That extra cashback can be irrelevant if you’re unable to pay off the credit card bill each month as it could easily be outweighed by interest charges.
The golden rule of cashback credit cards
Always aim to pay off your credit card each month on time, and in full, otherwise any money earned in cashback will be taken away by interest owed or fees.