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All You Needed to Know About Cashback Credit Cards

9th May 2011

Banking and lending institutions spend tons in marketing to get their respective credit cards into our wallets. And one way of enticing consumers is through the incentive schemes that come with the use of these credit cards. From garnering points which can be used for common purchases, to obtaining free miles to buy airline tickets, banks continuously think up tempting deals to encourage consumers to use credit cards often. But one of the more attractive rewards schemes which can really be beneficial to consumers is the cashback reward.

What are Cashback Credit Cards?

A cashback credit card is a type of card that rewards you with cash every single time you use it for purchases.

How Do Cashback Credit Cards Work?

Every time you use your credit card to make purchases, your credit card issuer charges the merchant a handling fee. Essentially the more you use your cashback credit card, the more handling fees the merchants will pay to the issuing banking, which the latter will then split with you in the form of cash rewards.

Why Choose Cashback Credit Cards?

As if the hard cash reward isn't enough, there are a lot more benefits you can have for owning and using a cashback credit card. These are:

  • The rewards you get to earn from using your cashback credit card are absolutely tax-free. So not only are you provided incentives for your spending, but using your cashback credit card is one way of getting tax-free income as well.
  • Normal credit cards typically provide reward points that are difficult to redeem. Either you have to only use the points in accredited merchants, or go through hoops to convert the rewards so that these go toward credit card payments. With cashback credit cards though, the rewards are immediately redeemable as cold hard cash through the bank once the rewards threshold is reached. Of course, the points can also be arranged to be put back into the card's funds for further purchases.
  • Banking institutions compete for clients all the time. This makes available really attractive cashback rewards schemes. Normally, card issuers offer 0.5% to 1.5% cash back every time the credit card is utilized. But there are issuers which pay more, some as high as 5% during promotional periods for every card use!
  • Cashback credit cards that offer higher rewards for common everyday purchases are available. So you get to purchase petrol, groceries, even transport tickets, and enjoy bigger cashback rewards for doing so.
  • In the past, cashback reward schemes usually lasted for a limited period of time. But nowadays credit cards offer cashback schemes that do not expire at all.

Is a cashback credit card the best choice for you?

While owning a cashback credit card is generally beneficial, it is not an ideal type of card for everyone. Here are the notable reasons:

  1. If you foresee not being able to pay in full every time. Not paying the balance on a cashback credit card in full every month will surely be a deal breaker. This is because any rewards cash you get to accumulate will definitely be dwarfed by the interests on the unpaid balance. So if you anticipate not being able to settle your card bills in full, then the cashback credit card might not be a good choice for you.
  2. If you have existing considerable debts on other cards. Applying for a cashback credit card might not be a good idea if your other cards still have big unpaid balances. For one, you might end up getting slapped with higher APRs on the cashback credit cards you get to obtain. Plus, you might end up in more debts by adding an additional card to manage.

Keeping the Cashback Credit Card in Good Standing Always

We've already mentioned that paying the cashback credit card balances in full every time is the key to maximizing the card's benefits. And the best way to do this is to set up a direct debit to pay off the balance every single month. Just remember to check with the issuing bank that the option to pay off in full is in effect so that you won't have to worry about unpaid amounts canceling out the cashback rewards you've earned.