What is cashback? Read this before getting that card…

Cashback refers to a small percentage of cash that you can earn by making purchases with certain financial products. Cashback is most commonly offered by credit cards, but some banks offer cashback debit cards. Additionally, some peer-to-peer payment providers like PayPal and Cash App have also introduced cashback offerings.

Here, we’ll explain how cashback works, whether cashback is worth it, and what you can do to protect your credit score and your personal finances when looking for cashback credit cards. Let’s get right to it!

How does cashback work?

Cashback is simple. Just spend using the cashback card, and you’ll later be credited with the cashback earnings. The earnings from your cashback card are usually deposited directly into the bank account associated with your credit card or applied to your card balance.

Some cashback credit cards offer cashback on all purchases. Other cashback rewards cards only offer cashback on purchases with a particular business, like a supermarket credit card. The cashback you earn from these purchases is a small percentage of your total. For example, a card with 1% cashback would give you £1 cashback for every £100 you spend with the card.

Some cards will have tiered cashback earnings depending on the type of purchase. For example, you might earn 0.25% on daily purchases like snacks, while earning 1% on groceries and 3% on petrol. Others simply have a fixed rate that applies to all purchases.

While cashback is a small reward for using your card, it’s not free money. You need to spend money to earn it. Therefore, it’s usually better to spend thoughtfully than try to maximise your rewards or benefits.

Related read: Looking for a new credit card? Ask yourself these questions before applying.

Is cashback worth it?

It depends. Cashback gives you a fraction of your money back, and that’s definitely worth it. But cashback is only beneficial if you use your credit card wisely. If you don’t, cashback cards might be more harmful than helpful, as they usually have higher interest rates than standard credit cards.

For example, as of August 2023, the average credit card interest rate in the UK was roughly 23.57%. Popular cashback cards from American Express (36.7%), Barclays (28.9%), and Santander (29.8%) all feature higher representative interest rates (APR).

If you don’t carry a balance from month to month, interest rates won’t affect you. If that’s the case for you, cashback credit cards could be well worth it. That said, you’ll want to avoid cashback cards with high annual fees and be careful that there aren’t any additional hidden fees in the credit card’s contract. Otherwise, it might not be worth it. 

Here’s how that works:

Let’s say you have a card that gives you 0.25% cashback on all purchases. And let’s say that card has an annual fee of £60. For the card to be worth it, you’d need to spend £2,400 on the card just to break even.

Keep in mind that some cashback credit cards will earn different amounts based on different purchases. So, you might earn 0.25% cashback on regular purchases, 1% cashback on groceries, and 3% on petrol. Even so, if your cashback card has an annual fee, your earnings might not pay off in the end.

Related read: What’s representative APR and why is my interest rate higher? 

The bottom line: cashback pros and cons

Pros

• Potential to earn rewards just by maintaining smart spending habits
• May be able to earn rewards on must-haves such as petrol or groceries
• Some stores may offer signing bonuses

Cons: 

• It isn't free money
• Some programs have hidden fees
• Annual fees may negate any earnings you've accrued
• Generally have a higher representative APR than normal credit cards

Cashback is a nice perk, but when you’re looking for the right credit card, it’s not something to get hung up on. Benefits like cashback and travel rewards won’t be a great help if you end up spending the same amount on costly interest payments or annual fees.

Remember that cashback is a marketing tool for credit card companies. Do diligent research to make sure you’re getting the credit card that’s right for you, not the one with the most enticing perks.

Don’t be penny-wise and pound-foolish. Get the Pave app.

One of the best things you can do for your financial wellbeing is managing and improving your credit score. In fact, an excellent credit score could save you thousands of pounds over years. Your payment history is the most important factor influencing your credit score, so paying your credit card’s balance on time and in full is a great way to start building your score.

Worried about missing payments? Pave can help you keep track of your payments and avoid damaging your credit score. Plus, the Pave app can give you personalised credit fixes to help you build your score further.

To see for yourself why hundreds of thousands of Brits have downloaded the Pave app, check it out on the App Store or Google Play today.

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