Understanding Cashback credit cards

Ever since the arrival of ‘The Discover Card’, the first credit card to offer a cash back reward program for its customers, the financial markets have gone into overdrive in an attempt to achieve loyalty from existing customers and strong incentives for new ones. Whilst many credit card lenders now offer interest rates as low as 0% for over six months, there has to be a limit as to how low these lenders can actually go in order to continue making profits. So, rather than continue to lower interest rates, many lenders have increased the number of loyalty rewards for their customers, focusing on the number of pounds the customer spends on the card.

The rise of the cash back credit card has proved particularly useful to a society of consumers who use credit cards more and more to pay for everyday expenses such as bills, groceries and petrol. If consumers tend to pay off their card bill off in full each month then they could certainly benefit from a cash back card that would give back a percentage of total spend as ‘cash’. The rates can vary depending on the lender but with a little research, the consumer could easily find themselves getting a return anywhere between 0.5%, to 5% for a limited time; so a customer that spends £4,000 a year would receive anywhere between £20 and £200 cash back.

With some credit card companies the customer will receive their total cash at a predetermined time of the year, and with others it may be a case of receiving a cheque once a certain cash value has been reached such as £20 or £50. The cash back reward can be redeemed against the balance on the statement, or if preferable, can be transferred to the consumer via BACS (bank transfer); each offer tends to vary so it is worthwhile taking that time to research and consider. Only a few credit cards offer a blanket cash back reward of 1% (1p cashback per £1 spent) so any card that offers more is seriously worth considering.

It would also be advisable to take in account your spending and repayment habits before committing to a particular card. The best way to get the most out of cash back cards is to pay off the monthly balance in full before finance charges are applied – the finance charges may surpass the cash reward making the benefits redundant.

Spending habits
Managing finance can be a tricky task and it would be advisable for anyone who has fluctuating spending habits to consider whether they can cover the cost of the monthly balance before taking out a card in the first place; but there are of course some added bonuses from paying on a credit card. Our consumer rights state that: spend on any credit card and the customer gets ‘Section 75′ consumer protection which basically means that buying anything over the cost of £100 (providing some of it is paid on the card), and the credit card company is equally liable with the retailer if anything goes wrong. A credit card company will usually request information on annual income which is why those who earn £20,000 per annum and above may find the annual interest rates lower or the cash back reward higher.

With the rise of the internet exposing the consumer to a much wider range of competitive offers, retailers have had to evolve their marketing schemes and produce the most lucrative deals in the hope of retaining their place in the public eye. With consumers already overwhelmed with internet advertising, understandably, it simply isn’t enough to offer the consumer the same deals they might find on the high street: with administration and labour costs reduced, and with a proven success rate in marketing through affiliate websites, it comes as no surprise that retailers are now looking to find the most suitable websites to advertise their products. Not to be outdone by other competitors, the retailer can’t afford to ignore the benefits that these sites could bring in terms of new custom and loyalty. It is worthwhile remembering that the fees for advertising on a website are much lower than any television or high street campaigns.

Cashback sites and credit cards
Cashback sites are a form of advertisement in that they recommend the most competitive retailers for a particular product, receiving commission from the retailer when the customer makes a purchase as a result of that introduction. However, the incentive with using a cash back website is that they return a large proportion of that commission back to the customer in the form of points or reserved cash which can then be claimed back in agreed intervals. Therefore, in addition to the cash back benefits that can be received on the card alone, simply by using a cashback website to buy, the customer can increase the rewards. For example, one major credit card lender offers 5% cash back for the first three months with up to £200 money back, then up to 1.5% with no limit on cashback. A spend of £500 per month will see a return of £75 in the first quarter and £67.50 for the rest of the year; but simply by applying for the cashback card through the Cashback Club website guarantees a reward of £13.50, plus a joining credit of £5, giving a total cashback reward of £161 with that particular lender.

Similar to the cashback credit cards, the cashback websites will usually store points or redeemed cash for a certain period of time, though this is mainly to encourage customer loyalty which essentially benefits everyone: the more you spend, the more you get back. Unlike a credit card that might redeem cash onto the existing balance of the credit card i.e., pay off some of the debt on the card with the cash back earned, the money accumulated and redeemed through a website can be spent on any number of other retail providers. Though there may be some research needed into making your money suit your spending habits, the potential rewards are very much worth any effort.

Filed under: Cashback Guides