Cashback credit cards explained

Cashback credit cards have all the basic features of any other credit card – credit limit, interest, APR, monthly statements – but they also have an added benefit of allowing you to earn "cash back” on your purchases.

Read our guide to learn more about how cashback credit cards work, what cashback actually is, how to compare cashback credit cards and what the pros and cons are. If you'd rather start with the basics, you can also read up on how credit cards work first.

What is cashback?

Cashback is essentially money you earn from each purchase you make.

For example, if you have a cashback credit card that gives ‘1% cashback’ on every purchase you make, you will earn £1 after buying something for £100.

It is a way by credit card providers to encourage people to use their credit cards more often, as there’s incentive behind it. But it's also a way for you to make money back from your regular spending.

The difference between spending on a cashback credit card and a standard credit card or debit card can often come down to the money you’ll get back.

But there is a downside to cashback credit cards. Many of the best offers come with a high annual fee and are usually aimed at people with large salaries.

Plus, the APR on cashback credit cards can be much higher than the average credit card’s interest rates, which means it’s only really worth having one if you can afford to pay it off on time to avoid paying any interest.

How do cashback credit cards work?

Cashback credit cards come in a few varieties, but usually they have an introductory offer, which is a higher rate of cashback than the standard rate.

After the introductory offer, the cashback credit card will give you a permanent rate of cashback.

Each purchase you make will give you cash back according to the rate you have on your credit card.

Some cashback credit cards have a tiered system, where you get, say, 0.5% cashback when you spend up to £5,000 in a year, and then 1.5% on any amount over £5,001.

But how does the cashback get paid to you? This varies depending on each credit card’s rules.

Some cashback credit cards credit your account monthly, while others pay you on an annual basis.

You’ll then be able to spend using your cashback rather than your credit limit, although some providers can pay the money into your bank account.

Some credit card companies will give you the option to turn your cashback into vouchers to use at selected retailers.

These are usually converted at a slightly higher amount to make it worthwhile; otherwise everyone would simply take the cash.

Why are American Express cards not accepted everywhere?

You want to use your American Express cashback credit card but the shop you're in says that they don’t accept American Express. Is it still worth it?

American Express is a credit card network, but unlike Visa and MasterCard, it is also a credit card provider.

All credit (and debit) card providers charge an interchange fee, which is essentially a fee paid by the shop to their to bank to handle the card transaction you’ve made.

American Express credit cards come with a higher fee for the shop you’re spending in, which is why not all shops accept them. Visa and MasterCard fees are generally much lower for the shop to process.

However, this does usually mean that American Express is able to offer bigger and more frequent rewards to their customers.

They are not the only credit card provider offering cashback, so it’s worth looking around the market to see what’s best for you.

Credit cards with cashback and no annual fee

You can find cashback credit cards with no annual fee, but generally the rate is lower than what you might get on a credit card where you paid an annual fee.

Sometimes a cashback credit card with an annual fee works out to be better value, but it depends on your spending habits as well.

Create a budget for the year and base your potential cashback earnings on what you would normally spend on a credit card.

If your cashback won’t be higher than the annual fee, then it’s better to get one without it.

If you’re planning to spend big on a regular basis, and you can still comfortably afford to pay your balance off in full and on time, then the annual fee cashback credit cards might be a better option.

Cashback credit card comparison

Ultimately, the best cashback credit cards are the ones that suit your regular spending habits and what you think you’ll make the most use of.

Before making a cashback credit card comparison, have a look at what your average monthly spending is, and set a limit for how much you can afford to pay off on your credit card at the end of the month – it really is not worth paying the interest.

Most cashback credit card comparisons will have a table explaining the rate of cashback paid and possibly a calculated figure of how much you might make when spending a certain amount of money each year.

These figures might help you come to a decision, but it's also worth having a look at the introductory offer period and see if that can also benefit you.

For example, it’s coming up to Christmas and you’re already planning to spend more than usual in a short space of time, so a cashback credit card with a high introductory rate might be the one for you.

But what about in the long run? Do you want to be stuck paying the annual fee every year on a credit card you barely use?

Don’t just think about the introductory offer, and try to look at the bigger picture of how the credit card can get you some money back on your regular spending.

3 cashback credit card tips

Use our three golden rules to using and comparing cashback credit cards.

1. Always pay the balance off in full and on time

It’s never worth paying the interest on a cashback credit card, as the APR is often much higher than other credit cards. Plus the cashback you make won’t be enough to make the interest charges worth it.

2. Use the introductory rate to your advantage

If the credit card you want has an introductory rate of, say, 5% in the first three months, don’t get it when your budget is tight and you’re trying to save money.

Use the rate to your advantage, and plan it around a period of time when you’re already going to spend more than any other time, for example, before Christmas, summer holidays or on a new wardrobe. However, don’t use the cashback as an excuse to spend more than you might otherwise.

3. Weigh up the annual fee against the rate

Sometimes the best cashback credit cards have an annual fee.

Don’t let that put you off without looking at how much you could earn in cashback just by spending what you normally would over a year. Look at your regular annual spending and see if you get more with a cashback credit card with a fee, than one without it.

If this is your first credit card then consider reading up on our guide for first-time credit card holders to learn more.

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