How Cash Back Credit Cards Work

Credit cards are a convenient and flexible way of borrowing money to pay for goods and services. When you pay for something using a credit card, the provider is effectively lending you the money.

Every month you’ll receive a statement which lists all your transactions and there will be a set time in which you are expected to pay the full amount back. If you pay it back in full, you won’t be charged interest.

A cash back credit card is a special type of card. This card rewards you when you spend money on it. Rewards are typically in the form of cash! So if you spend £1,000 on a 1% cash back card, you’ll get £10 back.

Benefits Of Cash Back Cards

If you use your card on the things you’d spend money on anyway, the average spender could easily earn hundreds of pounds extra a year. Especially if you consider rent and council tax can be paid by credit card in some places these days!

A recent study showed that the average person is missing out on anywhere from £300 to £1,500 in cash back over a year. That is effectively free money down the drain!

Another underestimated benefit of using a cash back credit card, is the financial protection on offer. Under Section 75 of the 1974 Consumer Credit Act, card issuers and retailers take joint responsibility for faulty purchases or misdescribed products or services as long as it’s valued between £100 and £30,000. This protection only applies to credit cards and not debit or charge cards. For example, if you bought something from a company in the UK or abroad and it then went bankrupt, you’ll be able to claim from the card company.

Cash back credit cards are also great if you’re trying to build up a good credit rating (you should!). This will help you when you apply for other lines of credit in the future e.g. a mortgage.

Why Do Companies Offer Cash Back Cards?

Cash back cards may sound too good to be true. You spend money and get money back! Weird, huh?

But there’s a very clever reason why credit card companies do this. They hope that you’ll spend lots of money on the card and then not pay it back in full and just cover the interest. This makes them money and will offset anything you get via the cash back.

Therefore, set up a Direct Debit which covers your outstanding balance in full every month so you don’t get charged interest. That way, you can enjoy all of the gains from your cash back card!

What Are The Fee’s Associated With A Cash Back Card?

You should only get a cash back credit card if you can pay your monthly credit card bill in full. That way you won’t be charged any interest.

However, apart from interest rate charges if you don’t pay your card in full, some cash back cards add one or two other fees. This is typically in the form of an annual fee of around £25.  You want to make sure that the card you pick pays enough interest to outweight this charge.

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