What is cashback and how does it work?

We break down what a cashback credit card is, how it works, when it’s a good idea to get one and what you need to look out for.

Post-it notes with the text “What is cashback and how does it work” and The Motley Fool jester cap logo

Sometimes, credit card rewards can seem a little intangible, for instance, a voucher here or a discount there. If you’re one of those people who prefer money in your pocket, then cashback will rock your world. In this article, we’ll teach you what cashback is and how you can use it to get the most out of your spending.

What is cashback?

Cashback is a way of earning money back when you make a purchase using your credit card. You get a percentage of the amount you have spent paid back to you.

Every time you spend on your credit card, you’ll automatically receive a percentage of that amount as a reward. It can either be applied to specific purchases, or to anything you spend on your card.

How does cashback work?

Your card will have a specified cashback percentage that you will receive. For example, if your card pays 1% cashback on all purchases, then you could earn £1 when you make a purchase of £100.

This means that the more you spend the more you can earn. So if your annual credit card spend is £5,000, you could cumulatively earn yourself £50.

The cashback is generally paid annually, but some cards pay it on a monthly basis. Most of the time, it is added to your statement, reducing your credit card bill. But with some credit cards, you can opt to have it paid into a nominated bank account so you can spend it.

What are the benefits of cashback cards?

Let’s face it, there are few things as rewarding as cash in your pocket. Some of the pros of cashback rewards include:

  • Decent rewards percentages: Cashback rewards of 1% or 1.5% are decent when compared to other rewards programmes. What’s more, some cards offer a higher percentage of cashback on certain purchases, such as dining or fuel purchases, or shopping at a certain retailer.
  • More spending freedom: Some rewards programmes only allow you to use your rewards towards specific purchases. For instance, travel rewards can only be used for flight purchases, car hire, and in some instances, hotel bookings. With cashback, you can do what you want with the rewards. You can even use them to offset your credit card fees.
  • Signup bonuses and combined perks: Look at cashback comparison charts to find the option that offers the best rewards and perks. These include no annual fee and the opportunity to earn extra points during the signup period. Some may also offer 0% interest on balance transfers or special bonuses when shopping at partner retailers.

What are the drawbacks of cashback cards?

While the benefits of a cashback credit card are obvious, there may be a few disadvantages too:

    • Earnings cap: If you’re a big spender and you’re hoping to earn endless cashback rewards, it’s time to check out those terms and conditions. Some cashback offers have an earnings cap which limits the amount of cashback you can earn.
    • Possible high APR: It’s important to keep an eye on the card’s APR to make sure you’re getting the best deal. Even with a card offering an introductory 0% interest period, you still need to be aware of what the rate will be once that initial period is over.
    • Limited earnings potential: When you sign up for a cashback card, ensure that you’re going with an offer that allows you to earn where you most spend your money. If your cashback is limited to fuel and dining out, but your major expenses are groceries and fashion, you might not enjoy the full potential of your cashback.

Which cards offer cashback?

Some of the top credit card providers offer cashback credit cards. These include American Express, Santander and Barclaycard. Here’s a quick overview of their offers.

American Express Platinum Cashback Everyday Credit Card

The American Express Platinum Cashback Everyday Credit Card is a great all-rounder for those who want more than just cashback. There’s no annual fee on the card and no cap on the rewards cardholders can earn. A signup bonus allows cardholders to earn 5% cashback for the first three months, up to a maximum of £100. After the initial three months, cashback is earned at a rate of 0.5% to 1%, depending on the spend.

Santander All In One Credit Card

Those who have high balances on their other credit cards will find the Santander All In One Credit Card agreeable, as it offers 0% interest on balance transfers for the first 26 months and 0% interest on spending for the first 20 months. Furthermore, there’s no balance transfer fee and you get to earn 0.5% cashback on all purchases.

Barclaycard Rewards

Cardholders of the Barclaycard Rewards card earn 0.25% cashback on all spending, and there’s no annual card fee.

When is a cashback credit card worth it?

If you are disciplined enough to pay your credit card balance in full each month, then a cashback credit card can be a good idea. You’re essentially getting rewarded for spending money that you would have spent anyway.

It can be an effortless way of earning a small amount of passive income.

Should you get a cashback card?

A cashback credit card is a great option for those who want to earn rewards on everyday spending and be able to use those rewards for just about anything. If you’re not big on travel rewards or perks, and simply want a card to tick all the boxes, be sure to go for an option that offers well-rounded perks such as fee reductions and low or no interest rates.

Compare our top rewards and cashback credit cards in the UK to get started today.