How do cashback credit cards work?

How do cashback credit cards work?

By Matt Fernell, Editor-in-Chief at Published 8th April 2024.

Matt Fernell

A cashback credit card can pay you back a percentage of what you spend on it, but only if you use it correctly. Find out how cashback cards work with our guide.

What is a cashback credit card? 

When you spend on a cashback credit card, you'll earn cash rewards where the money earned is either taken off your outstanding balance or given back to you as a voucher. 

For each transaction, you'll get back a percentage of what you spend, usually between 0.25%-1%, although some of the best cashback credit cards can earn you as much as 5%.

How do cashback credit cards work? 

Cashback credit cards work the same way as other credit cards. You can borrow up to your credit limit and repay what you've borrowed, accumulating interest if you don't repay the total amount within a month. 

The difference with cashback credit cards is you'll get money back every time you spend. The amount you get back will be a percentage of each transaction's value, which will be agreed upon when you first apply for the card and may depend on your credit history.

For example, if you get a card offering 1% cashback on all purchases and spend £500 on a new fridge, that would earn you £5 back.

It's unlikely you'll get cashback instantly. It is often paid automatically, either back onto your credit card to clear some of the balance or directly to your bank account. Cashback can be paid monthly, quarterly or annually, so check the terms with your credit card provider. 

Cashback credit cards will start charging you interest on your balance if you don't pay it off in full each month. This interest can eat away at the cashback you're earning, so when you use these cards, it's essential you have a plan to repay your balance each month. 

Some purchases won't qualify for cashback. Always read the terms and conditions carefully to make sure you'll get the maximum benefits of a cashback card. 

How much could I earn with a cashback credit card?

How much you can get will depend on the cashback rate you’re offered and how much you spend on the card.

Cashback is calculated as a percentage of what you spend; for example, a rate of 1% means you will earn £1 for every £100 you spend. Card providers can set cashback rates in different ways, including:

  • A flat rate: For example, 1% cashback on any purchase you make using your card at any time

  • Spending-specific rate: For example, you get a higher rate of 3% cashback if you spend more than £3,000 in the first three months

  • Introductory rate: For example, you get a higher rate of 5% for the first three months, then it goes down to 0.5%

  • Retailer-specific rate: For example, you could get 2% cashback when you spend at certain shops and 0.5% everywhere else

To determine which rate is best for you, consider how you will use the card. If you know you will spend a lot on the card, a spending-specific rate could earn you the most cashback.

However, if your spending will be temporarily higher, for example, if you’ve just moved house, a card with an introductory rate could be the best option.

Can I get a cashback credit card with bad credit? 

Cashback credit cards offer valuable rewards, and because of that, you'll need to have a good credit history to be eligible. To give yourself the best chance of being approved, you can do a few things that will help improve your credit history. 

Some things you can do to improve your credit rating include: 

  • Register to vote 

  • Update any out-of-date details on your credit report

  • Report any mistakes on your credit report

  • Avoid late repayments on current credit products

  • Keep old accounts open to build a credit history

  • Stay under your credit card limit

  • Avoid credit card cash withdrawals 

  • Pay off any existing debts

You can also apply for credit cards designed for people with a poor credit report. A credit builder card can be a helpful way to improve your credit rating. These types of credit cards have lower credit limits and higher interest rates.

After using a credit builder card for several months and making repayments on time, your credit history will improve to the point where you can apply and get approved for cashback credit cards. 

Are there any fees associated with a cashback credit card? 

Some cashback credit cards will charge annual fees. You'll have to pay these charges monthly or annually to keep the account open.

Card fees can range from £25 a year to £195 a year, and generally speaking, the higher the fee, the better the cashback you can get.

However, some of the best cashback credit cards don't charge an annual fee, helping you maximise your savings. 

Similarly to other types of credit cards, you may also be charged for things like:

  • Withdraw cash from an ATM

  • Spending abroad

  • Making a late payment

  • Exceeding your credit limit

Are cashback cards worth it? 

If you plan on making many purchases in a relatively short time, cashback credit cards can help you save money by reducing the balance you have to pay back. 

Cashback credit cards are beneficial when you're going through a period of unavoidable increased spending or for everyday expenses like petrol and food shopping. 

For example, if you do most of your shopping on your debit card and don’t go into your overdraft, you could use a cashback card instead and effectively get a discount on your spending.

Cashback cards may not be as beneficial if you don’t use your card regularly throughout the year. These cards often charge annual fees, and if you're not spending enough to earn cashback, the costs could outweigh the amount you earn.

How do I make the most of my cashback credit card? 

To get the most out of your cashback card, you should use it for all your everyday spending.

This means instead of using it for less frequent, larger purchases, it's more effective to use it for everything you buy, like paying for your weekly food shop, fuel, eating out and public transport costs. Frequent and regular usage will help you to build up your cashback balance. 

When using your cashback credit card this way, it’s best to repay what you use straight away to avoid having to pay interest on your outstanding balance. 

A balance that's not repaid within a month increases because your credit card provider will charge you interest on top, which can cancel out any cashback you've built up. 

To make sure you're always paying back what you borrow in full before interest is applied to your borrowed balance, it may be worth setting up a direct debit to repay your entire balance automatically.

When doing this, ensure you don't exceed your credit limit because you'll be charged a fee. To maintain a good credit rating, keep your credit utilisation low by using no more than 30% of your credit limit.

The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.