Cashback can be a handy credit card perk to have. It gives you the opportunity to earn money on your spending, essentially providing you with a discount on your purchases or a little extra cash to spend. So what is it? And how does it work?
What is cashback?
It’s 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 you may find 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.
When is it a good idea?
Earning cashback when you spend on your credit card may seem like a great idea, but you’ll only really feel the benefit if you pay your credit card bill in full each month. Otherwise, interest charges could erase any benefits you might get from earning cashback.
If you clear your credit card balance at the end of each month, and if your spending habits suit the cashback reward that is on offer, then you could really feel the benefit of having it as a perk on your credit card.
Cashback really works if you earn it on transactions you would have made anyway. Then you are essentially giving yourself a discount on those purchases or earning yourself a little extra for something you needed to buy in the first place.
Is there a catch?
Every credit card is different. The rate of cashback you can earn will be different depending on the card you have. It’s certainly worth noting that the type of transactions you can earn it on will vary.
It is important to be aware that most cashback credit cards cap the total reward you can earn each year.
In addition, you may find that some providers require a minimum spend amount in order to qualify. And that cashback is sometimes included as a reward on credit cards carrying an annual fee.
These are all things to consider when selecting your cashback credit card. It could affect whether you really benefit from having it as a reward on your card.
Cashback is an easy and simple way to earn some money when you spend on your credit card. However, in order to maximise your returns, it’s important to pick a card that suits your spending habits. If you are interested in getting one, then take a look at our comparison of the top-rated cashback credit cards in the UK.
Remember that you’ll only feel the advantage of having a cashback credit card if you always pay off your balance in full each month. Otherwise, the money you earn will be eroded by interest charges.
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.