How does cashback work on a credit card?

Key takeaways

• Cashback credit cards offer a way to straightforward and rewarding system: you earn money back each time you make a purchase or pay a bill using the card

• With regular use and paying off your balance in full every month, cashback can accumulate significantly

• Maximise benefits by selecting a card that suits your lifestyle

• Watch for annual cashback caps, especially during higher-rate periods
  

Among the various incentives offered by credit card companies, cashback credit cards stand out as a popular choice for consumers. looking to get a little more bang for their buck. But earning a few pennies in return for each pound you spend doesn’t give the whole picture, as our guide explains.

What is a cashback credit card?

A cashback credit card works in the same way as any other credit card, except that the cardholder will earn a little bit of money back each time they make a purchase or pay a bill using the card. It's a simple yet effective reward system: spend money, and get a percentage of that spend back.

How does cashback work?

Cashback percentages are not always a flat rate; they can differ based on the type of purchase or spending thresholds.

Some cards offer tiered rewards, providing higher rates for spending above a certain limit, while others maintain a fixed percentage across all purchases.

It's important to consider any annual fees associated with higher cashback cards and ensure that the benefits outweigh the costs.

How much can I earn from a cashback credit card?

The potential to accumulate cashback can be quite enticing. With regular use and paying off the balance in full each month diligent payment of the full balance each month, cardholders can see a significant return over time.

Cashback rates can vary, typically ranging from 0.25% to 1%, and some cards offer enticing introductory rates of up to 5% for a limited period. For example, spending £100 with a 1% cashback rate puts £1 back into your pocket.

Will I earn the same cashback for every £1 spent?

Not necessarily. Cashback percentages are not always a flat rate; they can differ based on the type of purchase or spending thresholds.

Some cards offer tiered rewards, providing higher rates for spending above a certain limit, while others maintain a fixed percentage across all purchases.

It's important to consider any annual fees associated with higher cashback cards and ensure that the benefits outweigh the costs.

Can I have more than one cashback card?

There isn’t a limit on the number of reward or cashback credit cards you can have, but it's worth noting that each application can impact your credit score.

A strategic approach to managing multiple cards can help you make the most of introductory offers, but keep in mind the minimum spends and spending thresholds that may apply.

Can I get a cashback card with bad credit?

It can be difficult to get approval for a cashback credit card if you have bad credit because these cards are typically targeted at people with good credit ratings who pay off their balance each month.

However, you can increase your chances of being accepted for a cashback credit card by improving your credit score.

One option to consider is applying for a credit builder credit card, which can help build your creditworthiness over time – making it more likely you’ll get a cashback credit card in the future.

What are the pros and cons of cashback credit cards?

Advantages

• Cash rewards: The primary benefit is, of course, earning money on every qualifying purchase

• No hassle: If you pick a card that fits in with your lifestyle, you’ll be rewarded for simply continuing your current spending habits

• Bonuses: Some cards offer additional perks, such as sign-up bonuses or rewards for reaching certain spending thresholds

Disadvantages

• Higher interest rates: If you're unable to pay the full balance each month, the higher Annual Percentage Rates (APRs) associated with these cards can be costly

• Potential fees: Can come with a monthly or annual fee that should be weighed up against what you expect to earn in cashback

• Temptation to overspend: The incentives provided by cashback cards might encourage some cardholders to make purchases beyond their means

Kara Gammell
Personal Finance & Insurance Expert

Our expert says

"Cashback credit cards are most beneficial for those who are disciplined enough to pay off their balance in full each month.

"Using the card for everyday spending can help maximise the cashback earned, but it's crucial to be wary of the interest and fees that can quickly negate any rewards.

"For those who may carry a balance, a card with a lower APR or a 0% introductory rate on purchases might be a better fit."

What are the alternatives to a cashback credit card?

While cashback cards focus on monetary rewards, there are other types of reward cards that provide different forms of value, such as store credit, Air Miles, or loyalty points. These alternatives cater to a variety of preferences and spending habits.

If you want to earn cashback, but don’t want to take out a credit card, you can also find a current account that offers rewards when you pay bills or make purchases.

Other useful guides

For those looking for more information on credit cards, consider exploring more of our guides:

• Credit cards explained: Understanding the basics

• How to choose the right credit card for you

• How long does it take to apply for a credit card?

Comparing cashback credit cards

When you compare cashback cards with us, we'll show you your likelihood of acceptance before you apply, and searching won't harm your credit score. We act as a broker, helping you find the best deal without charging you for the service.

MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.