Cashback Credit Cards

Cashback credit cards pay you each and every time you spend on them. This can add £100s a year to your income, without any hassle, plus you get added legal protection too. Provided you repay the card in full each month, so there's no interest, it's by far the best way to spend. This full guide compares the top cards and includes all the latest best-buys.

Cashback credit cards are the best way to spend

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

Yet before beginning, it's important to follow....

Always set up a direct debit to pay the card off in full each month, so you'll never pay interest, otherwise that more than wipes out any gain.

The reason card companies offer cashback or any reward scheme is simple, they want to encourage you to spend on the card so they can earn interest from it. 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, instead focus on a card with a lower interest rate instead, see the 0% Spending Credit Cards guide.

• Do you have existing credit card debts? Here you'll save more money by keeping them cheap, than going for cashback. And as applying for any financial product has a minor credit score impact (see the Credit Rating guide), ensure they're sorted out before applying for a cashback card - see the Best Balance Transfers guide.

The easy way to pay off in full.

The best way to pay off in full each month is via a Direct Debit, which unlike a standing order, allows the card company to take a variable amount each month to correspond with what you owe it (see the Direct Debit guide for more).

Sadly a few card providers deliberately miss the 'pay off in full' option off their Direct Debit forms, as it means they'll make less money; if that happens just write in ‘pay off in full' and send it in. The rules mean they should honour it, though do call up after a week or so and check it's in place.

Once this is done, your credit card has effectively become a Debit card, yet one that pays you every time you spend on it. While they don't like it, credit card companies don't lose money as they charge retailers every time someone uses one of their cards. In many ways using this technique, you're effectively claiming much of that retailer's fee for yourself.

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 can make serious cash. It takes advantage of the fact that many credit cards will lend you money for a short time at 0% interest. If you take that money and save it in a high interest account you'll be quids in. See the full step-by-step Stoozing guide.

• Credit Card Freebies. Many credit cards offer incentives like free flights or electronic goods for you to 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. A full list of what's available is in the Credit Card Freebies guide.

BEST BUYS: The UK's Top Cashback Cards

Over the last few years, the number of cards offering cashback deals to new cardholders has diminished rapidly, yet it's still possible to get a serious whack. The benchmark rate is 0.5% cashback (50p per £100 spent); any card paying more is a good contender. Which card wins depends on how much you spend on it and its acceptibility.....

The Overall Winner: Amex Platinum

Pays 5% cashback for 3 months, then up to 1.5% after.

The American Express* Platinum Moneyback card pays new cardholders an unbeatable 5% cashback, 5p per £1 spent, for three months up to a maximum of £2,000 spending (£100 cashback earned). After that its rates are tiered depending on how much you spend, up to 1.5% cashback.

It's worth noting though that while Amex is accepted at most high street stores and big chains, as its charge to retailers is high, some small restaurants and independents don't accept it. See the who takes Amex? forum discussion. Yet with such mammoth cashback, even with this it'll still usually outpay other cards over a year. Plus MoneySaving nerds can do what I do and holster a back-up non-Amex cashback card for just such occasions.

• Quick Tip 1: Time your application.

  The super-high rate only lasts three months, so try and time the application, which usually takes around three weeks, so the 5% rate coincides with a period of high spending e.g. if you're moving house, or in late Sept. so it covers the Christmas period and January sales. In the meantime use another cashback card (see below).

• Quick Tip 2: Use a joint card

  If you're in a relationship and trust each other, maximise the gain by both applying for a card at staggered periods. E.g. Janet applies for the card and makes John a second cardholder so they both get 5% cashback for three months. After that John applies for the card and makes Janet the second cardholder to get another three months at 5%. There's no guarantee the offer will still be available then; but you've lost nothing by trying.

  After that period continue to just use one person's card, as joint cardholders, as with the tiered rate structure this also increases the cashback.

  Quick Stats: Intro Cashback. 5% for 3 months on up to £2,000. Standard Cashback. 0.5% on up to £3,500/year, 1% on £3,500 to £10k/year and 1.5% above that. Standard Rate: 18.9% APR Min. Income: £30,000 per household Max. cashback/year: NONE

The Non-Amex alternatives

The following cards are all either issued by Mastercard or Visa, so you'll avoid the problem of American Express cards not being universally accepted. There are other cards out there which pay more, yet these are closed to new customers, however if you already have a cashback card, don’t assume these beat it.

• Halifax/Bank of Scotland (Mastercard). Pays 1% cashback on groceries/fuel, 0.5% on everything else.

  The best non-Amex cards are from Halifax and Bank of Scotland. You earn 1% on all spending on groceries and fuel, and 0.5% on any other purchases, up to a maximum of £150 per year. The cashback can only be claimed in £15 increments.
  
  Purchases which qualify for the higher 1% have to be from specified retailers. These are... Groceries: Asda, Morrisons, Tesco, Sainsburys, Waitrose, Aldi, Lidl, Iceland, Somerfield & more. Petrol: BP, Esso, Shell, Texaco, Q8, Murco, Asda, Tesco, Morrisons, Waitrose & more.

  Quick Stats: Cashback Rate. 1% on groceries/petrol. 0.5% other purchases Standard Rate: 15.9% APR Min. Income: NONE Max. cashback/year: £150

• A raft of cards paying 0.5%.

  A selection of credit cards pay a flat rate of 0.5% cashback on all spending, though each works slightly differently.

  The simplest is Leeds Building Society, which pays 0.5% on everything, with no annual cashback limits, or required salary to apply for it (17.9% APR). The Moneyback credit card from Bank of Ireland also pays 0.5%, but only up to a maximum spend of £15,000, meaning £75 can be earned each year (17.9% APR).

  Slightly more complex is Barclaycard's OnePulse card, which pays 0.5%, up to a maximum of £15 a month (i.e. £3,000 monthly spend). This is guaranteed to be the cashback rate until August 2010. On top, you earn 5% cashback on all spending with Transport for London (the London tube and underground), again capped at £15 a month (12.4% APR). To get this, you need to have a good credit rating, be over 21, and earn at least £20,000 pa.

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 guide.

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 and there’s a chance it could be seen as a taxable benefit (you’ll still be up even if it is though)

Yet do beware of setting up regular payments from it, or any other credit card, though. 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...

75. — (1) If the debtor under a debtor-creditor-supplier agreement falling within section 12(b) or (c) has, in relation to a transaction financed by the agreement, any claim against the supplier in respect of a misrepresentation or breach of contract, he shall have a like claim against the creditor, who, with the supplier, shall accordingly be jointly and severally liable to the debtor.

Which of course, reads like gobbleydegook... 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. It means order something and if the 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.

Beware cash withdrawals and balance transfers.

It's important to understand, 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.

• Never balance transfer on a cashback card

  It's no coincidence that many cashback cards have top balance transfer offers – they want to tempt you to both spend on the card and shift debts to them. This is because your monthly repayments are automatically allocated to repay cheap balance transfer debts first, leaving the much higher interest from spending debts expensively trapped until all the cheap debt's repaid. In other words you can't ‘just pay off the costly debts from spending'.

  By far the best thing to do is use separate cards for earning cashback and balance transfers (see the Balance Transfers article).

Work out what you'll earn

Spending on a cashback card and paying it off in full far outstrips using a debit card, you can make £100s/year by using the right one.

Plug in how much you're likely to spend, and whether or not you're new to my top pick Amex Platinum card into this special calculator, and it'll work out how much cashback you'd make, for free, over a year.

Estimated Annual Spending £

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Do remember though, this is just for the top player, Amex Platinum. If you go for either of the 1%-paying alternatives, you can work out your annual cashback by dividing the amount you expect to spend by 100