General Cash Back Credit Card Guide

It seems almost too good to be true; a credit card company giving back money to the user just for spending it in the first place! However, as with all good deals, there are terms and conditions.

What is Cash Back?

Cash back credit cards give back a percentage of the user’s spending every month, and that percentage depends on how much is spent. The company will not actually send the user crisp fivers in the post, but will deduct the cash back amount from the next month’s balance.

What’s the catch?

The rate of cash back depends not only on the user’s monthly spend, but also sometimes on their salary too, and possibly a minimum monthly spend limit too. It may even have an annual charge, so watch for this.

What’s the other catch?

To make the card work for the user, the full balance should be paid off at the end of every month to avoid interest charges. Otherwise, the cash back benefits are completely wiped out by the interest charges, by a ratio of up to 5:1. Also, some cards put a cap on the amount oif cash back that can be earned in a year.

Not for those in Debt

This also means anyone who owes money at any rate of interest, whether cards or loans. Cash back credit cards are NOT suitable for those with any outstanding debt; again, any cash back earned on this card will be wiped out by the interest on any other outstanding debts.

Debit card or cash back?

Users of debit cards can benefit from using cash back cards so long at they pay off the full balance at the end of the month by Direct Debit. Instead of making purchases on their Debit Card, they use the cash back card instead. The money remains in their current account until the end of the month, when the Direct Debit clicks in and pays off the cash back card. In effect, the money not spent from the current account has earned the equivalent in interest of the cash back amount, usually considerably more than the interest offered on most current accounts. However, combine a cash back card with a high interest paying current account, and the advantages are clear.

Sweeping

Smart users can take this principle one step further, sweeping (transferring) the money they plan to spend on their cash back card from their current account into an instant access savings account for three weeks after payday. They then sweep the money back one week before the Direct Debit for the cash back card is due, earning interest on their money AND cash back on their purchases. This can even be set up on an internet banking site as a regular payment to and withdrawal from the savings account. ING Direct offer a good rate with easy, instant, internet access.

Mortgage Sweeping

Any interest earned on money in a bank account is taxed at source. One smart way to get tax-free interest on swept money is to have an offset mortgage. Money added to the savings element of an offset mortgage account decreases the total debt, so less interest is charged. Sweep across, say £100, and keep it in the offset account for two weeks, and for those two weeks the total mortgage debt is reduced by £100. The account holder has saved two week’s worth of interest charges on that £100, AND that saving is tax free. (Newcastle Building Society currently offer an offset mortgage with low set-up charges.)

Budget Warning!

Remember, the money in the current account (or savings account if swept across) is NOT available as ‘extra’ spending; it is there to pay off the cash back card at the end of the month.

Who’s the Daddy?

American Express cash back cards offer the best deals at time of writing, with different levels of cash back available.

For the High Roller: You’ll need to earn over £20,000 to apply for the Amex Platinum card, and need to spend a fair amount to make it really pay well. The percentage cash back depends on the level of spend during the year, offering:

• 0.5% on the first £3,000 spent
• 1% on spending between £3,000 and £7,500
• 2% above £7,500

For the Medium Roller: the Amex Blue card offers:

• 0.5% for the first £2,000 spent
• 1% over £2,000

Once annual spend reaches £7,500, the Blue user will be better off using a Platinum card. Be aware that if the user spends under £500 per annum, a £15 annual charge will apply.

What’s the problem?

American Express cards are not universally accepted by retailers, so savvy cash back card users may like to have an Amex and a non-Amex card in their financial armoury.

The best non-Amex card

The best non-Amex card currently offered, and also the best for low spenders, is the Morgan Stanley cash back card. It offers 1% cash back on the first £2,000 and 0.5% on all spending above that.