Cash back is just one of the incentives offered to new cardholders by credit card companies competing for their custom. Other rewards include 0% balance transfers, 0% credit cards on purchases and spending, long term low balance transfer rates and card with low annual percentage rates (APRs). But there's something appealing about the prospect of cash in hand. This makes cashback credit cards a popular option.
Cash back credit cards work like this. Cardholders spend as usual and at the end of a given period they get cash to spend. In many cases this is simply added as a credit on their credit card. The cash back is usually remitted once a year, either at the end of the calendar year or on the anniversary of taking out the credit card.
The amount of cashback you can get varies considerably. It can be as little as 0.5% or as much as 3%, depending on the credit card and the terms and conditions set out by the card issuer. For example, some credit cards offer a higher cashback in the first year of owning the card. This is then reduced in subsequent years. Other credit cards offer a higher cashback when you spend more on the card.
Whether or not you should have a cashback credit card depends on your spending habits. If you pay your balance off in full every month, then you won't pay any interest and can really benefit from a cashback credit card.
People who leave a balance on their credit card may find that cashback cards don't work as well for them. They will still earn the cashback on any spending, but that will be eliminated by the cost of interest on any outstanding debt. This may not matter while you're getting a 0% interest rate on the card, but will make a difference once the offer period comes to an end.
Balance transfers, interest free credit cards and cash withdrawal fees can also be pitfalls for the unwary cash back credit card user. Transferring a balance means that you will have a large sum of money at a preferential rate. When you spend as usual and make the usual payment, that payment does not clear your latest spending. Instead, it reduces the amount transferred onto the card, while recent spending is charged at the higher APR.
For regular payers who want to benefit from a balance transfer, it might be worth having another card for this purpose. That way you can continue to get cashback, while transferring a balance at a rate that you find acceptable.
There are also other reward schemes that are not as flexible as cash and it is best to compare credit cards, but which may put even more money in your pocket. Many credit cards offer reward points schemes. Points can be exchanged for vouchers or spent in certain high street or online shops. With certain rewards schemes, such as Nectar, combining a credit card and a points card can result in a 4% reward, and there are many places where those points can be spent.