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How cashback credit cards work

Cashback cards explained:

These cards are similar to rewards cards. They are a great option for those that can be sure to be able to pay back their balance in full each month, allowing you to actually earn money with your card in some cases. This is particularly the case for those that spend a lot, where the cashback exceeds the annual rate charged. Her we’ll discuss some of the benefits and drawbacks of these cards.

The advantages are straightforward: you get a percentage amount back on the amount that you spend. This percentage rate varies by card, you can expect between 0.5% and as high as 6% in some rare cases. This will depend on your spending and also might be a little more complex to calculate – sometimes there will be a higher introductory cashback rate which reduces over time, and sometimes there will be a combination of rates depending on the type of purchase and amount spent.

Drawbacks and things to consider

While they are a great option for the reasons outlined above, there are some other things to keep in mind when using them.

  • There may be an annual fee, so make sure your expected cashback amount exceeds this
  • As mentioned, there will usually not be a flat cashback rate for the duration of the card and for all purchases. Usually you will get a higher rate during the initial usage period
  • These cards usually have high requirements in terms of credit score, and in some rare cases might have income requirements
  • The annual fee might make it not worth your while if you don’t have the spending habits to earn high enough cashback
  • It might be better to get a rewards card instead. These are particularly appropriate if you travel a lot and want the “air miles” rewards or spend in a certain participating outlet frequently, as the total amount of rewards will often exceed the rate of cashback for a similar cashback card. The downside is that unlike cashback, redeeming these rewards is tied to a specific merchant or retailer.
  • The cashback might be paid out annually, so it can take a while to get rewarded for your spending

Pitfalls of cashback credit cards

The main thing to be concerned about with cashback cards is the high interest rates that can be levied in the event that you cannot clear the amount owed each month. These cards are designed with clearing of the debt each month in mind, so typically the interest rate levied will be higher than for other types of card in the event you can’t pay off the balance each month. This also increases the risk of charges accruing on the account in the long-term.