Determining if cashback is right for you, and which card best suits your needs

By Benjamin Salisbury

Considering a cashback card? There are plenty of cards that could be earning you money each time you make a purchase. However, it's important to consider where you most use your credit card and if the cashback deal is worth potential extra costs, such as an annual fee.

Cashback credit cards reward you by repaying a percentage of every pound you spend on qualifying purchases, usually between 0.5 and 1.25 per cent. Programmes vary -- you may receive a higher cashback rate for particular purchases such as petrol or groceries. Many cashback cards also offer an introductory period that allows you to earn more during say, the first three months that you own the card. choosing-cashback-card

According to Parmjit Dhillon, spokesperson for American Express Europe, the use of cashback credit cards is increasing. "Those using credit cards with rewards choose cashback as the reward of choice, with 43% opting to get something back for their everyday spending in this way [in 2014]," Dhillon said in an email response to questions.

According to American Express data, this is a 6% rise from 2013, and an 8% rise from 2012, he said.

But the cards aren't for everyone. Many of the best cashback deals are only available to consumers with good to excellent credit scores. And if you regularly carry a balance, you will be better off getting a zero-interest credit card. The difference in interest charges will more than make up for any cashback rewards you'll forego.

You may also find you'd prefer a different kind of reward. Frequent travellers may find better deals by using an airmiles card. Others may prefer rewards cards that earn them points for free merchandise or discounts from particular retailers.

How to choose the right cashback card for you
If you're committed to finding a cashback card, first figure out how much of the money you spend each month is via credit card, and where you spend the most. Your answers will dictate whether it's best to get a card that offers more cashback for certain types of spending, or a card that offers the same cashback on all purchases.

For instance, if you spend a lot on petrol or commute to work by rail, you might want a card like the Santander 123 Credit Card MasterCard. It offers 3% cashback on petrol and rail fares, up to a combined spend of £300 a month; plus 2% cashback on spending at major department stores and 1% from major supermarkets. It comes with a £24 annual fee. However, if you have or open a Santander 123 current account, the annual fee is refunded the first year.

If you'd rather get a flat rate for every kind of purchase you make, consider something like the American Express Platinum Cashback Everyday credit card or Platinum Cashback card, both of which offer a promotional rate of 5% cashback for the first three months.

After that, the Platinum Everyday card allows you to earn up to 1.25%, depending on how much you spend (the more you spend, the higher your cashback rate is). There's no annual fee for this card. The Platinum Cashback's rate is 1.25% after the introductory period, no matter how much you spend. However, it comes with a £25 annual fee.

It's important to pay attention to those annual fees because they cut into your net earnings from the card. For example, if you spend £200 on the card each week, and your cashback rate is 1%, you would get back £8 each month x 12 months = £96 a year. If the annual fee is £25 pounds, it's probably worth getting the card; if the fee is £100, you won't even break even.

Don't sabotage your own earnings
Cashback credit cards are only worth having if you pay off your balance in full each month; otherwise the interest charges will outweigh the cashback. Set up a direct debit to ensure you pay the balance off in full each month (this will also ensure good credit behaviour).

It's also vital not to spend unnecessarily just to reach a new tier of spending that earns a slightly higher cashback rate. Use the card for purchases you already have planned, not as an excuse to spend more and potentially land in debt.

A better way to boost your earnings, according to Dillon, is to use more than one card. "You can also get supplementary cards for a relative or partner whose spending can then boost your cashback earnings," he said.

See related: 5 tips for using rewards cards wisely, Giving back with your credit card

Published: 26 September 2014