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Cashback Credit Cards – What are They and How Do They Work?

in Credit Cards

Cashback credit cards are just like any other regular card, but with the added bonus of receiving a certain percentage of cashback on purchases you make. This guide takes a detailed look at cashback credit cards, the most popular types of cashback, and the different types of cashback you can expect, when looking at different providers.

What is cashback?

Cashback is when you directly receive money back on expenditures. So, if you make a purchase, a percentage of that purchase will be reimbursed into your account. The more you spend, the greater amount of cashback you will receive (subject to terms and conditions), which makes this a popular incentive for users who like to spend frequently. Cashback applies to many different things in life, though it always means essentially the same thing; getting real money back into your account.

Common cashback rewards

Different cashback cards will offer different types of cashback, and it is worth checking out all the options before settling on a deal. A popular form of cashback is introductory cashback, which will provide a certain percentage back on expenditures for a given time period. Typically, the cashback you receive will be valid up to a certain amount, and will vary between 5%-10% of what you spend. This introductory period will usually be 3 months. Please be aware that most introductory offers will cap the amount of cashback you are able to receive, and some schemes will only provide cashback on specific types of purchases.

The best cashback credit cards will also give you the chance to earn cashback after the introductory period is over, known as long term cashback. The percentage usually drops after the introductory period, though the chances to earn can still be very good, with you able to receive around 1%-2.5% cashback on purchases, depending on how much you are spending. The best credit cards are the ones which offer around 2.5% long term cashback rates, and do not cap the amount of cashback you receive, though in general you will expected to spend plenty with the card. Once you have reached a certain expenditure threshold, the cashback percentage may increase. These non-introductory cashback incentives usually refresh each year, taking you back to the lowest percentage until you start spending and reaching payment thresholds once again.

Tips to get the most out of cashback

Credit cards with cashback offer this type of reward scheme to encourage spending, though if you are not careful, the advantages of cashback become inconsequential, for example if you incur extra credit card charges or have to pay back with added interest. Also, many cards only provide you with cashback if you stay within your spending limit and make the correct re-payments each month. To make the most out of cashback schemes, not only should you keep on good terms with your provider, you should also do your best to repay the outstanding balance every month, otherwise the interest incurred will counterbalance the cashback money you receive.

In this way, you use cashback credit cards just like a regular debit card, not using the card to borrow money, but to repay whatever you spend and gain the most with the cashback it gives. Many people capitalize with such cards in this way, using another low interest credit card for longer term borrowing instead. If you cannot, or do not intend to repay your balance in full each month, it would be better to get a card with lower interest instead. Having said this, cashback cards can still be beneficial if you are planning a big spend, especially for cards that have good introductory cashback rates which are not capped by a certain amount of expenditure. If so, opt for a card with a high introductory cashback rate, make the spend, and get a good amount of money back.