How does cashback work on a credit card?

Key takeaways

• Cashback credit cards offer a way to 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. 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 cards often follow a simple model. For example, if your card pays 1% cashback on all spending and you spend £800 a month, you'd earn £8 in cashback each month, or £96 over a year.

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

Some cards also offer tiered rewards, providing higher rates for spending above a certain limit. For instance, you might earn 0.5% cashback on the first £5,000 you spend each year, rising to 1% on spending above that.

If you spent £7,000 over the year, you'd earn £25 on the first £5,000 and £20 on the remaining £2,000, giving you £45 in total cashback.

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

What are the features of cashback credit cards?

Not all cashback credit cards are the same. While they all reward you for eligible spending, the way you earn cashback can vary depending on the card. Here are some of the most common features to look out for:

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, 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.

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 an easy win, as long as you can pay off your balance in full each month. Use the card for everyday spending and the cashback mounts up with no extra effort.

But if you carry a balance or miss a payment and you’re charged a late fee, any benefit is quickly wiped out.

If you’re not confident that you can always clear your credit card debt, then it’s usually better to opt for a card with a lower APR or a 0% introductory rate on purchases.

What are the alternatives to a cashback credit card?

While cashback cards focus on monetary rewards, there are other types of reward cards that offer different benefits to suit a range of spending habits and preferences, including:

• Store rewards. Earn vouchers, discounts or credit to spend with a specific retailer

• Air miles. Collect airline miles that can be redeemed for flights, upgrades or other travel-related rewards

• Loyalty points. Build up points through a loyalty scheme that can be exchanged for rewards such as shopping vouchers, travel or experiences.

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 the key features of each card so you can make a quick and easy informed decision.

We’ll also show you your likelihood of acceptance before you apply, and searching won't harm your credit score.

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.