How to use cashback and rewards credit cards
As a nation, our use of credit cards currently shows no sign of waning. As of January 2023, an estimated 58.7 million credit cards were in circulation, according to Finder.com. And £18.8 billion was spent in the same month, an increase from the £16 billion spent in January 2022.
Understanding how credit cards work and the costs is important, especially as credit card debt can get out of control. The Money Charity estimated the average credit card debt to be £2,394 per household in August 2023. Despite the risks and potential interest charges, some cards have added benefits, such as cashback and rewards.
- What are cashback credit cards?
- What are rewards credit cards?
- How do cashback and rewards credit cards work?
- Is a cashback credit card worth it?
- How to find the best rewards credit card for you
What are cashback credit cards?
As the name suggests, cashback credit cards allow you to get a percentage of what you spend with their card back, effectively giving you money off your purchases. They’re usually associated with credit cards, although can be offered on current accounts. Prepaid cards can come with cashback, too, although prepaid cards differ from credit cards in that they must be topped up. What qualifies for cashback very much depends on the terms and conditions of your specific card, as some providers will only offer it on fuel or at certain retailers, while others give you more flexibility.
What are rewards credit cards?
Rewards credit cards let you build up points that can later be converted into vouchers for shops, hotels or air miles. Put simply, you are rewarded for spending on them. Usually, these cards encourage customers to use them as frequently as possible. Higher than usual interest rates mean they are generally best suited to cardholders who will pay the entire balance off in full, every month.
How do cashback and rewards credit cards work?
By shopping with a cashback credit card you’ll be able to ‘earn’ a certain percentage of what you spend on it back. If your card pays 1% cashback, for example, and your total spend is £100, this will mean £1 finds its way back into your pocket.
When and how you’ll ‘see’ that £1 varies from provider to provider. Most will pay it annually, although some will give the cashback you’ve accrued monthly. The amount you earn may be credited onto your statement, so reducing your credit card bill, or sent to a designated bank account where you’ll be free to spend it. If you’re feeling generous, you may even be able to have it donated to a charitable organisation.
With points-based cards, you’ll usually be able to exchange them once you’ve earned enough to qualify for a ‘reward’. Be warned, however, that once you've accrued them some points and rewards may have an expiration date. Don’t hold onto them for too long unless you’ve checked this out first!
Other things to be aware of include potential caps on how much cashback you can earn, so make sure you’ve done your homework and know what you are and aren’t entitled to. And some providers may insist you spend a certain amount first, and only offer cashback or rewards once you’ve met this pre-agreed minimum.
In other respects, cashback and rewards credit cards work just the same as standard credit cards. Use your credit card responsibly and treat it as debt. This means, of course, that going over your credit limit is a big no-no – not only do you risk being charged, you’ll also put your credit rating in jeopardy.
Another no-no is using your credit card to withdraw money, called a cash advance. A cash advance with a credit card can be costly. You also want to try pay off what you owe in full to avoid getting charged interest on your outstanding balance.
Is a cashback credit card worth it?
This depends entirely on your spending and, crucially, your repayment patterns. Let’s start with the latter. If you’re good at clearing your credit card balance at the end of each month, then getting a card that gives you something back could be worth your while. However, the moment you stop paying off your card in full, the interest incurred on any remaining debt may start cancelling out any rewards you’ve earned.
By having incentives to use your card, like money back in department stores, there’s also more chance you’ll be tempted justify that splurge on, say, a new pair of designer boots – and consequently rack up higher bills – to get your hands on that apparent ‘saving’.
Remember, the bigger the balance, the less chance you have of being able to pay it off in full. And, of course, the more interest you’ll be charged.
Which leads us neatly back to our other point about whether these type of credit cards are worth it – how you spend. Because the really important thing to bear in mind here is that spending more doesn’t mean you’re going to save more. It can be easy to get our heads turned by the promise of 5% cashback on a 60-inch telly, but if you weren’t going to buy a new box in the first place, you can hardly claim to be quids in.
Self-control is key – if you know you’re likely to cave in, maybe cashback credit cards aren’t for you. That said, if there’s a big-ticket item you’ve been looking to get your hands on for ages, like a replacement washing machine or romantic weekend break to propose to your partner, they can potentially serve a purpose, especially if you can take advantage of attractive introductory offers.
Some providers, for example, will entice you with higher cashback rates for the first three to six months, but move to a standard, lower rate after that. If this is the case, our tip is to buy what you need at the start – it could make all the difference to how worthwhile you perceive the card to be.
Finally, as with all financial products, read the small print first. Although cashback on what you spend at the till might sound tantalising, if it’s not at a shop you’d ordinarily visit, or that’s completely out of your way, there may be little point applying for a card. And maybe scrutinising the T&Cs will reveal uncompetitive interest rates, or an upper limit on the amount of cashback you can earn, high fees for the privilege of having the card in the first place, or the fact that some purchases might not earn you any cashback at all… Whether or not these affect your decision will depend entirely on your individual circumstances but don’t go into any deals blind.
Always do the research first.
How to find the best rewards credit card for you
You can get an overview of what credit cards are on the market by using a comparison site like MustCompare. This will allow you to compare rewards credit cards, from those that pay a flat rate of cashback, to those that offer you points based on your spend. By looking at a wide sample, you should be able to better identify the card that’s best suited to your regular spending habits or future needs.
Remember, when we talk about ‘regular spending habits’ we don’t just mean where you shop or how much you spend, but how you usually pay for goods. If you prefer debit card for certain day-to-day purchases, like groceries or fuel, and don’t intend to change that, then lumping this into your ‘total monthly spend’ when trying to forecast how much cashback you might be entitled to will give a false impression.
When you compare credit cards, look for any fees you might be charged for the card, which could be payable on either a monthly or yearly basis and, of course, the annual percentage rate (APR), which is typically higher than a standard credit card. Remember that the interest rate you see advertised on comparison sites – the ‘representative example’ – won’t necessarily be the one you're given. That will depend on your credit rating.
Once you’ve narrowed down your choice, one last thing to bear in mind is that each application will be recorded on your credit file. It’s wise to make sure you meet the eligibility criteria first, as applying for lots of rewards or cashback cards in a short period of time could impact negatively on your score.
There are other types of credit cards that you may find better suited to your needs. For example, interest free credit cards allow you to make purchases without incurring interest charges for a certain period. Zero interest transfer balance credit cards will enable you to transfer your existing debt to another credit card that charges a lower interest rate or 0% interest.
Concluding
Credit cards with cashback and rewards can be beneficial. If used correctly, they save you money in the long run. However, as with all forms of debt, there are risks, including potential interest charges. Something to think about is for these cards to work, the benefits or rewards need to outweigh the costs. Plus, rewards and cashback are likely to come with some restrictions.
There are other options, too. For example, many bank accounts and prepaid cards offer cashback and other benefits. Credit cards, too, have other uses; for example, some allow you to make purchases with no interest charges for an agreed time.
Take your time to compare financial products to find what is right for you.
Get notified of our latest guides and updates by signing up for our newsletter below.