Cashback Guide
How does cashback work?
Cashback is really quite simple. For each purchase you make using your credit card, the card issuer will pay you a small percentage back as a 'reward'. To make money from a cashback credit card you must pay it off in full every month, otherwise you will get charged interest. One month's interest could be greater than a whole year's cashback gains! However, even if you do not pay off your cards in full each month, it is better to have 1% cashback than none!
Cashback profit
You can typically make between £50 and £200 per annum, but more is possible. It depends on two factors: how much money you spend on your credit card and what percentage cashback your credit card offers. For example an annual spend of £10,000 on a 1% cashback card will earn you £100. A £30,000 spend on a 0.8% cashback card will earn you £240.
Can anyone make money from cashback?
Any credit card user can potentially make money from cashback credit cards. There are no significant risks from cashback, but follow the tips below to ensure you don't get caught out:
(a) Don't be tempted to spend too much. Having a cashback card should not mean that you spend any more money than you would have previously, otherwise you will be worse off, not better off.
(b) Try to pay the credit card off in full each month, otherwise the interest charged on the outstanding balance will be more than your cashback earnings.
(c) Make sure that you make your credit card payments on time. If you make a late payment you will be charged interest and a late payment fee. This would wipe out your cashback earnings.
Choosing your Cashback Card
The main feature you should look for is a high percentage cashback rate. That may sound very simple, but it is complicated by the fact that some card issuers provide a flat rate for cashback, whereas others offer different levels of cashback depending on how much you spend on your card during the year, and others offer more cashback during the first few months.
This means that if you want to maximise your cashback returns then you need to understand your spending patterns i.e. how much you are likely to spend on you credit card in the course of the year and whether you have any major expenses coming up soon that would make a card with a good introductory cashback rate beneficial.
If you track your spending using a notebook or computer then look back to see how much money you have spent on credit cards historically. If you don't track your spending, have a look back through a few months worth of credit card statements.
Don't forget that with a cashback card you will be trying to maximise how much of your expenditure you will put through the card, so add a percentage increase on to your historical spending figure. [N.B. This is not advocating spending more money to earn cashback, merely putting a greater amount of your existing expenditure through a cashback card !]
You can find a comprehensive list of the best cashback cards on our cashback cards table.
Credit limit
You should try to find a card with a credit limit that will comfortably take your peak monthly spend. For example if your normal monthly budget is £1000 but you might have a car repair bill (£500) and pay for a holiday (£1500) in the same month then you will need a credit limit of at least £3000.
Read those T&C's
As with any credit card, it is very important to understand the service and the terms and conditions offered by the card. For example, a 24 hour customer service centre and/or managing the account online might be very important to you or there might be a 'catch' in the T&C's which will make it difficult for you to operate the account.
Another consideration is how widely accepted your chosen credit card is. This is not a problem if you have a Visa or Mastercard credit card, but it is a consideration if your primary cashback card is an American Express card. Most major stores, hotels, garages, airlines and travel companies accept American Express, but small shops usually do not. If American Express is you preferred cashback card, have a Visa or Mastercard cashback card as a backup.
Tips to Maximise your Cashback
First of all, ensure that you understand your spending profile and choose a good cashback card.
Secondly, be imaginative! It might surprise you how many things you can pay for with a credit card. Most people would expect to be able to use a credit card for buying food at the supermarket or buying clothes and CDs etc, but did you know that some local authorities will let you pay your council tax by credit card? Your utility suppliers will probably let you pay by credit card, although many offer a discount for paying by direct debit so that may be better than cashback. You can pay for your household and car insurances by credit card. The author/editor of this FAQ paid for a £14,000 kitchen on a 1% cashback card, earning £140 in the process.
When out for dinner, pay by credit card. Some will put a meal with friends on their cashback credit card and have their friends give them cash for their share. This means that cashback is earned on the total value of all meals, not just your own. Of course, friendship is more important than a few pounds of cashback, so don't jeopardise any friendships by doing this.
If you have to pay for work-related expenses before claiming them back, then you may wish to consider using a cashback credit card.
As stated before, whether you use your credit card for your own or your employer's purchases, it would be a false economy to spend more money than you need solely to maximise your cashback.
What Next?
Click here if you want to choose a Cashback Card now
Click here to read our Cashback FAQ
| Cashback FAQ |