As the credit card market becomes more and more competitive, companies are using enticing incentives as a way to attract card applicants. Cash back credit cards tend to be available to people who are looking for a credit card and who have a good to excellent credit record. Cash back credit cards are essentially credit cards that reward its users by awarding a sum (ie. the cash back) based on how much is spent on the card.
How these cards work do vary from lender to lender. Some cash back credit cards offer cash back rewards based on a percentage of credit used. For instance, if a consumer uses a credit card to purchase £100 worth of goods or services on a card that offers a 1.5% cash back reward, he or she receives £1.50 back as a reward. Other cards offer rewards based on points. Consumers earn points based on money spent for certain goods and services. They can use these points for redemption in the form of cash or gifts.
There may be a limit to how much cash back you receive
You should note that some cash back cards have limits on how much cash back you are entitled to receive. Once you reach a certain limit, the cash back reward stops, normally until the anniversary of your credit cards start date. And, with some credit cards, the more you spend, the less of a percentage you get back. Once you reach a certain limit (say, you have spent £4,000 on your credit card over a period of time), then some providers will give you a smaller percentage back.
Because of this, it is important that you check out the terms and conditions of any card you are considering. At Confused.com we can help you do this, with our simple to use comparison tools. This empowers you to find the right card for your circumstances.
So, you are probably thinking, this cash back thing sounds really quite good – but why would credit card companies give cash back to borrowers for using their cards for purchases? After all, credit card companies are in business to make money in interest from our spending.
The answer is that there are two major benefits to credit card companies that cause them to offer us these incentives.
Firstly, the cash back motivates us as consumers to spend more because of the thinking that we are saving money because of the cash back! Secondly, credit card companies make an income from transaction fees charged to retailers that process card transactions. Thus, the more we use our cards, the more transaction fees the card companies can bill to retailers. So now you know!
What you should consider
Anyway, back to the important stuff – what you should consider when choosing a credit card. Users of cash back reward cards must be aware of all the traits of the card, along with the cash back bonus. A cash back reward of even 1-2% is not that impressive on a card that has a significantly high interest rate. Often, cards that do promote the cash back bonus heavily are using it as a way to encourage consumer use, in spite of potentially high rates. Many of the best cash back bonus programmes are offered by higher rate cards. This is fine if you pay off your balance in full every month. If you don’t and you carry your balance across, any money you do ‘earn’ as a cash back will almost definitely be swallowed up in interest repayments.
Discounts with retailers
Some cash back bonus programmes are linked to networks of business providers. For instance, many cards offer higher cash back bonuses, such as 5% for purchases made at in-network retailers. This is usually based on cooperative marketing or sharing of costs of the promotion between the card company and the retailer. This can be a better benefit to consumers who carefully research cards to see if they purchase products and services regularly from the in-network providers.
Some cash back credit cards also allow card holders to opt for gift certificates or charitable donations in place of a cash reward. Usually, by selecting these alternative rewards, the cash value is greater.
- the key to selecting a card offering a cash back reward is to compare the benefits with the negative factors of the card. So, if a card has a high interest rate, or unfavourable payment terms, the cash back bonus may not be rewarding enough to make the card a good option
- shop around! Our credit card search engine will do all the legwork for you, you simply select the card that best meets your requirements