Would a Cashback Credit Card be right for You?

04-Nov-2009

If you are a credit card user who pays off your cards in full each month, you probably find that you have no real need for the 0% balance transfers and introductory interest rates offered by the big card companies.  A cashback credit card could therefore be a good way of ensuring that you get some additional benefits from the card.  

So how does a cashback credit card work?

When you spend money on a credit card, the merchant has to pay a commission to the bank or other card provider for taking the payment.  Some credit card providers share this commission with the card holder as an incentive for using the card regularly, in the form of air miles, loyalty points or actual cash.

How much money would I get back?

With a cashback credit card scheme, you actually earn a small percentage of your spend (typically between 0.5% and 2% of your purchase amount minus any returns) each time you spend money on the card.  

To tempt in new customers, card providers will often offer a particularly good rate for the first 6 months, up to 5% of your net purchases, after which time it decreases.  You will also find that some purchases will net you a higher commission percentage than others, so it is worth shopping around for the card provider that favours the type of things that you spend your money on anyway.

How to make sure you don't get into debt

As soon as you open your account and get your card, set up a direct debit to ensure that you repay the full amount each and every month.  Unless you specify clearly on your credit card direct debt, credit card companies will automatically deduct the minimum balance from your account each month.  Therefore, tick the 'Pay balance in full' box, or write it on the form and call up the provider to check that it has been set up correctly.

The interest rates on credit card debt are some of the highest in the financial services industry (with cashback cards often highest of them all), so only take out this type of card if you're prepared to clear the balance every month.  Having to pay interest on your balance will more than eat up any cashback you may have earned over the month.

What are the alternatives to cashback credit cards?

If you feel it's likely that there will be some months when you will not clear the balance, it's better to choose the credit card with the lowest interest rate instead.  Alternatively, if you find that you often run out of money before the end of the month, a prepaid credit card might be a more sensible option since you can only spend money that you have already loaded onto the card.