For every purchase you make on a cashback credit card, a percentage of the purchase amount, typically being around 1%, is credited to the credit card account or paid to the card holder separately as an annual rebate. You can earn a higher cashback rate with certain introductory offers.

The system behind the cashback program is quite simple; when accepting a credit card payment, an American retailer pays a percentage of that payment in commission to the banks. The bank’s cashback program works by simply sharing this commission with their customers.

Cashback credit cards can be a great way to save you money by effectively offering you a discount on purchases. However, they should only be used when you are confident that you can repay the full balance at the end of each month otherwise the benefits of the cashback scheme are quickly outweighed by the card’s fees. 

Is a cashback credit card right for me?

If you are considering a cashback program you should first ask yourself the following questions: -

Will you be able to pay off your monthly balance in full? If you feel that you will struggle to pay off your balance before the interest free period expires then you should avoid a cashback credit card and instead consider a low annual fee credit card, which will save you money in the long run.

Will you be arranging a balance transfer as well? If you need to arrange a balance transfer on your new credit card then we recommend avoiding a cashback credit card or at least avoid using the card until the balance transferred has been paid in full. Any new purchases cannot be repaid until your balance transfer debt is cleared, and as a cashback credit card typically has a higher interest rate, you incur interest fees that will outweigh the cashback benefits.

Do you have a good credit card rating? If your credit rating is quite poor then it is unlikely you will be able to obtain a cashback credit card. Some of the best cashback credit cards are as per CreditCardHQ:
1) Target Red Credit Card  (Store)

2) Gap Credit Card  (Store)

3) Walmart Credit Card Store)

4) Babies R Us Credit Card Store)

5) Macys Credit Card Store)

Are cashback credit cards suitable with a balance transfer?

The cashback credit card programs are not a good option for people looking to transfer their existing credit card debt. This is because you are required to clear the balance transfer debt before you can repay any new purchases. The banks generally include balance transfers with cashback cards for this reason, as they are able to profit from high interest fees. 

It’s also worth noting that you do not receive cashback for the balance you transferred so there is really no reason to use a cashback card for a balance transfer, unless of course you are planning on paying back the balance transfer debt first and then use the card for cashback purchases. 

What are the advantages of a cashback credit card?

Earn cash – this is an obvious benefit with cashback cards, just remember to pay off your debt in full before the banks charge interest fees.

Discounts – the cashback rate effectively acts as a discount on all your purchases.

What are the disadvantages of a cashback credit card?

Higher interest rate – some of the cashback credit cards have a higher interest rate, something to take into account when deciding on a card.

Hard to get right – to fully benefit from a cashback credit card you must remember to pay off your monthly debt before the banks charge you interest fees, otherwise the money you receive back from the bank is quickly outweighed.

Limits on cashback earnings – you need to read the fine print on each cashback provider as there are limits to the amount of cash you can earn back on each card.

Cashback versus other reward schemes – as the cashback rates are generally low (as low as 0.5%) this loyalty scheme might not be as beneficial as a standard reward scheme, which might offer cheap flights, shopping vouchers, etc…

Limited to purchases only – the cashback offer is on purchases only and does not include cash advances from ATMs or balance transfers.

Annual fee – if you’re looking to simply benefit from the cashback offer then you must take into account the card’s annual fee. It might be more than the cash you earn back on the card, depending on the amount you spend.