Is Cashback The Future For Credit Cards?

Posted by Nick Niesen on October 29th, 2010

For several years now, one of the most sought after features on a credit card has been a long 0% balance transfer deal, almost to the exclusion of any other feature except maybe the headline interest rate of the card. More recently though, balance transfers have become less popular, not least because of the introduction of transfer handling fees, and there's now a new feature that more and more customers are considering to be of higher importance, namely cashback.

According to recent research, over a fifth of us now use a card that offers cashback or a rewards scheme, and the number has recently overtaken that of balance transfer users for the first time. So why has a seemingly simple feature such as cashback displaced the once mighty balance transfer deal in our priorities?

Credit cards have always suffered from the perception that they are expensive to use, with high interest charges and penalty fees - a reputation, it has to be said, that isn't altogether undeserved. Cashback cards give us the opportunity to turn that on its head, and actually come out on top financially by using our cards for everyday purchases.

For every purchase you make, a cashback card will effectively give you a refund of a small percentage of the purchase price. In the early days of cashback, this percentage was so small it was hardly worth considering - a 0.25% rebate was virtually worthless to most people with moderate spending habits. These days however, the figures are much more attractive, with a 3% rate not uncommon as an introductory offer. This kind of rebate is definitely worth having, and if you use your cashback card for all of your day to day shopping, the numbers can mount up surprisingly quickly.

What's more, if you use your card purely as a convenient payment method and not as a means of borrowing, and repay your full balance every month, then you'll avoid paying any interest fees or charges. This means that the money you 'earn' through cashback is totally free money - you're being paid simply to buy your usual shopping with a card rather than with cash.

Sounds good? Well, it's not hard to see why this kind of card has increased in popularity, but there are a couple of points to think about before applying for an account.

The main problem is that most of the time, you'll only receive your cashback once a year, either by check or refund to your account. This is fine for most people, but the cashback offer will be dependent on you sticking to the credit agreement. If, even accidentally, you make a late payment then you'll have broken the terms of your agreement and will lose all the rebate you've been building up. Keeping up to date with your repayments is therefore even more essential than normal with a cashback card.

Secondly, many cards feature a 'spending limit' over which no cashback will be earned. Most such limits are fairly generous, but check to make sure your expected annual spending on the card is within this limit if you want to maximise how much total rebate you can get.

So, are cashback cards the future? If you're a regular spender who can clear your balance in full every month, then they are very worthwhile indeed, but if you're planning to carry a balance then you might be better served by getting a card with a lower standard rate and no cashback or rewards feature.