Cashback Credit Cards 5% cashback for first 3 months

Cashback credit cards pay you every time you spend on them, possibly £100s a year. The top cards pay 5% cashback for the first 3 months, others give 3% on petrol and diesel spending.

Cashback cards: The best way to use them

Cashback credit cards are a form of reward scheme, yet rather than giving points, you get cold hard cash, tax-free, every time you spend on the card. As cash is totally flexible - you can spend it on anything - and it's easy to compare, for almost everyone it comes up trumps.

Before you start mentally counting the cash, ALWAYS follow...

Set up a direct debit to repay the card in full each month, so you never pay interest, which would outstrip any gain.

The reason card companies offer cashback or reward schemes is simple. They want to encourage you to spend on the card and pay them interest. The interest cost of all cashback cards dwarves the cashback you'll earn.

Therefore before applying for a cashback card, answer these two questions...

• Are you sometimes unable to repay cards in full? If you can't repay in full every month, focus instead on a card with a lower interest rate. See the 0% Spending Credit Cards guide.
• Got existing credit card debts? You'll save more by keeping them cheap than going for cashback. Every card application has a credit score impact, so ensure debts are sorted before applying for cashback cards (see Best Balance Transfers).

The easy way to pay off in full

The best way to pay off in full each month is via a direct debit. It allows the card provider to take a variable monthly amount to correspond with what you owe it (see the Direct Debit guide).

Sadly some providers deliberately omit the 'pay off in full' option from direct debit forms, as it means they'll make less money. If so, just write in 'pay off in full'. They should honour it, but call up after a week or so and check it's worked.

By doing this, you've effectively made your credit card a debit card, but one that pays you every time you spend on it.

It may sound obvious, but always stay within your credit limit. Otherwise you'll get hit with £12 charges.

Best Buys: The top intro cashback deals

If you've not had a cashback card before, or are about to embark on some big (but planned for and affordable) spending, you've a choice between a card that pays the highest short-term bonus rate of cashback (then a decent rate after), or one that pays good long-term cashback.

One thing to consider is whether you want an Amex or a Visa/Mastercard (the former is accepted by fewer retailers).

Other best buys

While the two cards above offer big intro deals, they may not be right for everyone. Here are the other top options that may be better for some.

Over £50k income & high spender

Big food/petrol cashback

Easy-to-get cashback card

Nationwide FlexAccount customers

Business credit card: 5% cashback for 3 mths

For a few people these cards can be beaten by specific-use rewards schemes, such as British Airways miles on its Amex cards or Nectar points on some credit cards, yet for most cash wins due to its flexibility. For more, see the Credit Card Rewards and Airline Credit Cards guides.

Get more free cash from credit card companies

Credit card companies throw serious cash at marketing in order to get their cards in our pockets. For those who don't need to borrow, it's possible to ride this wave of freebies to be quids in. There are two other ways to make money from credit cards.

• Stoozing
  
  This is an advanced technique where you take advantage of the fact that many credit cards lend money for a short time at 0% interest. Spend on that card instead of your debit card and then stash your salary in a high interest account and you'll be quids in. Full Guide: Stoozing
• Credit card freebies:
  
  Many credit cards offer incentives like gift cards or vouchers for free flights if you sign up to the card. Therefore if you've a good credit score, just take advantage by signing up even if you don't want the card. Full Guide: Credit Card Freebies
  

Think before adding the 'insurance'

Payment protection insurance is commonly sold with credit cards - the idea is it'll make some payments for you, usually for a year, if you are unable to (eg, if you lose your job).

There have been a myriad of cases where it has been mis-sold - borrowers didn't realise they were signing up for it, or it was totally unsuitable for them - and some big lenders have been fined.

The protection isn't always bad, though policies sold with cards are often overpriced (you pay a monthly amount depending on the size of your balance). If you want it, compare the lender's cover with standalone providers such as Paymentcare or Best Insurance.

Always be vigilant to check you aren't getting more than you bargained for when you fill in the application, then check your statement each month to check you aren't inadvertently paying for extras if you didn't ask for them.

Use the card for all spending

Once you set up a credit card, every time you use it you get paid. While this isn't an excuse to 'spend more' it does mean from now on...

Use the cashback for ALL normal spending, replacing cash, cheques, and other debit, credit & charge cards.

For those who have work expenses they need to reclaim, this can be a powerful way to earn more, at no cost to you, provided you can cope with paying the bill in full each month.

Do check it's fine with your employer, though as there's a chance it could be seen as a taxable benefit (you'll still be up even if it is).

Yet do beware of setting up regular payments from it, or any other credit card. These are technically called recurring payments and unfortunately, unlike standing orders or Direct Debits, once set up you can't cancel them, only the company you're paying can. If you're in dispute, this can be a nightmare (see the Recurring Payments guide for more).

There's extra protection on all spending too...

There's another big bonus to using a cashback card - you actually have far more consumer protection. This all comes about due to what's called Section 75 of the Consumer Credit Act 1974, which says...

Which of course, reads like gobblydegook... yet in a nutshell means:

Buy something costing over £100, here or abroad, and pay on a credit card, and the card issuer's equally liable if something goes wrong.

Now this protection only applies to credit cards, not debit cards or any other plastic and it's hugely important, especially in the current credit crunch climate. If you ordered something and ifthe retailer went kaput, you'd still be able to claim your money back from the card company. Read a full article on Section 75 refunds.

Don't withdraw cash or balance transfer

It's important to understand that you only earn the cashback when you spend on it. Other transactions don't apply. Worse still, there can actually be nasty consquences for doing anything other than spending on a cashback card.

• Never use cashback cards for withdrawing cash.
  
  Withdraw cash and you'll often be charged a fee, plus even if you pay the card off in full you'll usually be charged heavy interest. The rule's simple: never, ever, ever use these cards for cash withdrawals.
• Avoid balance transfer on a cashback card
  
  It's no coincidence that many cashback cards have top balancetransfer offers - they want you to both spend on the card and shift debts to them. The rules changed at the start of 2011 and monthly repayments are now allocated towards the most expensive debts first.
  
  This is good news, but as the balance transfer's at a higher rate you'll still get charged interest until all the debt's repaid. By far the best thing to do is use separate cards for earning cashback and balance transfers. See the Balance Transfers article.