A Guide To Cashback Credit Cards
Simply put, a cashback credit card is a type of reward card that gives you back a percentage of the money you spend on the card every year. More specifically, every time you swipe the card, you get a cash reward, which typically ranges anywhere from one to two percent of your purchase.
For instance, with a 1% card, you would receive £1 back for every £100 you spend on the card. The main difference between cashback reward cards and typical credit/debit or pre paid cards is that the former offer cash back benefits whereas the latter don’t.
Still, cashback reward cards have all the features associated with typical credit/debit cards including credit limit, monthly statements, annual percentage rate (APR) and relatively high interest.
Unlike other reward cards, these cards give you the flexibility to spend your reward (money) for whatever you want. At this point, it is important to note that most cashback reward cards allow you to apply your monetary rewards toward your account limit, freeing up money in your card for other needs.
Additionally, some card companies can pay your cashback into your saving account instead of crediting it to your card, allowing you to spend the money as you wish, whereas as other companies will allow you to convert your cashback into vouchers, which are usually converted at a higher rate, to use at selected stores.
In essence, credit card companies use these cards to cultivate customer loyalty. With that in mind, here is a detailed look at these cards.
How Do They Work?
As mentioned above, every time you use one of these cards at the store, the store has to pay the credit card company a percentage your purchase. In turn, the card company gives you a percentage of that fee back in order to incentivize you to continue using their card.
The cash rewards generally vary from one card to another, by card and can even vary from time to time within the same card. Still, most of these cards have an introductory offer, which is typically a higher rate of cash back compared to the standard rate. Once the introductory offer expires, most card companies give a permanent rate.
It is also important to note that some cards have a tiered reward system that pegs the percentage on the amount spent. For instance, 1.5% if you spend at least £5,000 annually and 0.5% if your annual purchases amount to less than £5,000. Also look out for 0% balance transfer programs which can save you a lot if you have debt on other cards.
Tips For Choose A Cash Back Card
Some of the most important factors to consider when choosing these cards include:
Your spending habits – Get a card that matches your spending habits. To do this, you first have to know where you spend most of your money. For instance, if you spend a lot of money in a single category, pick a card that’s geared to that particular category.
On the other hand, if you unable to determine where you spend most of your money every month, a flat cashback card with a single rate would be better option, particularly one with a good and sustainable rate (at least 1.5%).
Such a card would allow you to earn a higher reward compared to a straight 1% card. At the same time, if you’re willing to do the work every three months or so (quarterly), then a card with quarterly bonuses but require opt-in would be the right choice for you.
Minimum spending requirements – Most of these cards have minimum spending requirements. This means that to receive your cash back benefits, you have to fulfill these requirements.
The cash back limit – Before you use your card to pay for an expensive purchase, check to see if there is a limit to how much money you can get back every month. This is particularly important because some cards combine a high rate with a low cashback limit.
In other words, such cards have a cashback cap that could potentially prevent you from getting the most out of your card. That being said, most cash back programs have a maximum cashback limit while others only offer cash back for certain categories of products.
For this reason, you should read the fine print before you sign up for a card.
Compare different cards and their rates — When picking a cashback reward card, compare the rate of different cards. You can compare credit cards here.
How To Benefit From A Cashback Reward Card
To get the most out of your card, you need to do the following:
Pay off your monthly bill in full and in good time — To avoid interest on your card, always pay your bill in full in good time. This is particularly important because the annual percentage rate (APR) on these cards is typically much higher compared to the APR on other credit cards, meaning the interest rate will likely wipe out your cashback gains.
At this point, it is important to note that credit card companies normally charge interest on the entire balance irrespective of the amount owed. Put another way, the only way to avoid interest charges is to pay off your bill in full on time.
Annual fee versus no annual fee — Get a no annual fee card if your cashback will be lower than the annual fee. On the other hand, if you intend to spend big regularly and are able to pay off the balance comfortably, then a card with an annual fee and a higher rate would offer you the most value. In other words,
Take full advantage of the introductory fee — The best way to take advantage of a relatively high introductory fee, say 5%, is to get the right card when you plan to spend a lot of money or buy something expensive. However, do not let the high rate influence your purchase decision.
If you can, avoid cards with foreign transaction fees.
How Do Credit Card Companies Make Money?
Merchants that accept payment via credit cards typically pay a percentage of the transaction fee to credit card companies. Because credit card companies that run cash reward programs share only a small percentage of these fees with their cardholder, they are able to make a profit from merchant fees.
Other sources of revenue for credit card companies include interest rate, late fees and annual fees. Overall, there are lots of fees associated with these cards that credit card issuers use to recoup the money use to fund their cashback reward programs.
Because not all cashback credit cards are created equal, the right card for you will depend several factors including your spending habits and your ability to pay off your monthly charges in full every month. In general, these cards are a good option if you are able to pay off your monthly bill in full each month.
If you’re unable to do this, the penalties on the outstanding balance will likely exceed your cashback reward, causing you to lose money.
Remember, the APR on these cards is generally on the higher side. Credit card issuers use these cards to increase merchant fees and generate more revenue through other means including interest charges and annual fees.