You might have heard of cashback credit cards or even cashback websites as ways to make some extra money as you shop.
But what is cashback? Simply put, cashback reward schemes give people a percentage of whatever they spend back to them.
Each year, or sometimes every month, that you participate in a cashback scheme, you’re given the total cashback you’ve earned. This is yours to spend elsewhere, or it can go towards paying off your outstanding card balance.
Some cashback schemes offer the same amount of cashback for each type of purchase, while others offer different rates depending on what you’re buying.
Below, we’ll answer what is cashback, how does cashback work, what is a cashback credit card, and is cashback a good deal or not? We’ll also share the types of cashback schemes there are to choose from.
How Does Cashback Work?
To start benefiting from cashback, you must apply for a cashback credit card – or sign up for a cashback site.
But what does cashback mean? Well, once you start spending through the cashback scheme, a percentage of the value of each purchase you make will be collected as cashback and given to you annually or sometimes monthly.
Some cashback card providers offer 1-3% cashback on each purchase. Some offer different levels of cashback depending on the spending category. For example, a cashback credit card might offer 1% cashback on groceries and 2% on retail.
This makes it important to consider your spending habits when choosing a cashback credit card to maximise the rewards you generate from using it.
Cashback websites also use cashback reward schemes that work on a similar basis. What does cashback mean for site users? When customers shop online through the cashback website, they give shoppers cashback on each purchase. Again, the percentage cashback earned can vary between sites and between different types of products.
Cashback Credit Cards: What Are They?
Well, a cashback credit card is just like a regular credit card, which cardholders can use to do their everyday spending as long as they pay off the balance each month.
Each time a cashback credit card is used, the cardholder earns a percentage of the value of the purchase and any cashback earned is given to cardholders annually.
The amount of cashback you receive is determined by the terms and conditions of the card, so these are important to check out before applying. Make sure to compare between providers.
What is a cashback credit card with rewards?
Some cashback credit cards provide extra perks like access to events, financial benefits like 0% APR transfers, and discounts with certain stores or businesses.
Some cards – like the HyperJar rewards card – partner with merchants to provide tailored deals (for example, when you spend £50 with your favourite brand, you might get an extra £10 to spend) to cardholders.
Two main types of cashback credit cards are available, offering flat rates or tiered rates.
Flat rate cashback vs tiered rate cashback
Flat rate cashback credit cards offer a flat cashback rate on all purchases. So, if the card’s cashback rate is 2%, you’ll get 2% cashback on all your purchases.
If you opt for a tiered rate cashback credit card, you can expect that different spending categories will earn different cash back. For example, you might receive 1% cashback on groceries, 2% on energy, and 3% on retail.
Whether you should choose a flat rate or tiered rate cashback card will depend on your spending habits. You should calculate which card type will give you the best deal based on where you spend most of your spending.
Benefits of Using Cashback
So, is cashback good? The answer depends on the person, but owning and using a cashback credit card has several benefits.
Here are the top benefits of cashback.
1. Earn money back on your purchases
While obvious, you can’t talk about the benefits of using a cashback card without talking about the ‘cashback’ element.
For each purchase a cardholder makes, cashback credit cards give users a percentage of the value of their purchase back. So, cashback credit cards can be a money-saving hack that makes spending less expensive and gives cardholders more money to play with.
2. Improve your credit score
Many people wonder: is cashback good for improving your credit score? Like a regular credit card, reliably paying your cashback balance off each month is the best way to build up your credit score.
Having a good credit score is vital for a few reasons. You need it to be approved for loans – including business loans, personal loans, and mortgages – which are sometimes essential.
What’s more, the better your credit score, the more favourable the loan terms will be. In other words, a good credit score gives you access to loans with lower interest rates – a.k.a. less expensive loans, making you wealthier in the long term. It may also help you secure a more flexible loan repayment timeline.
3. Some offer a sign-up bonus
In addition to the cashback you earn from spending, many cashback credit cards also offer a sign-up bonus. In other words, free money that you can put towards your purchases.
Is cashback good enough to outweigh any annual fees charged by the card? This is something you’ll have to watch out for. Ensure that the perks of the card you apply for outweigh the annual fee, if there is one, or make sure you opt for a cashback card without yearly fees.
4. Rewards when shopping
Cashback isn’t the only reward that some cashback cards offer.
Sometimes, in addition to cash back on your purchases, cashback cardholders get access to additional benefits, like discounted products, interest-free transfers, or priority access to events.
Drawbacks of Cashback
So, is cashback a good deal? For some, it can be an easy way to earn a little, or save a little, depending on how you look at it, from spending.
1. Can encourage you to spend more
With the promise of earning cashback on your purchases, cashback cards sometimes encourage cardholders to spend more than they usually would. This is especially true for cards that have a minimum spending amount to earn any money back on your purchases.
Cashback can be a good deal if you have the self-control to only spend as much as you usually would. Buying more just to earn cashback defeats the purpose of owning a cashback card.
2. Cost of the card can exceed cashback earned
Many cashback cards charge cardholders an annual fee.
Though you might be enticed by a card provider’s generous cashback offer, you should ensure that the cashback, perks, and rewards you receive from using the card outweigh how much the card will cost you each year.
After all, many people don’t use their credit card enough to earn enough cashback to cover this fee.
3. Usually have higher interest rates
If you cannot pay your cashback credit card back in full each month, then the balance you owe on your card will be subject to high APR, usually higher than those of traditional credit cards (which is high enough already).
Is cashback a good deal? Well, not always. If you’re inclined to spend more than you can pay off immediately, cashback cards can be a dangerous way to acquire debt quickly. This far outweighs the benefits of earning cashback. It’s important to learn how to avoid debt where possible to remain financially stable.
Cashback Summed Up
So, what is cashback and is cashback good or not?
Cashback reward schemes pay cardholders a percentage of their purchase back each time they spend and can be an excellent way to make extra cash back on your purchases… in some cases.
If you can trust yourself to pay off your cashback credit card balance in full each month and not overspend in pursuit of cashback, you might reap the rewards of a cashback credit card. If not, you’ll probably end up racking up more debt than the cashback card is worth.
It’s important to check the minimum spending requirement of your chosen card to ensure you’d naturally spend enough to get cashback. Likewise, you should make sure that your chosen card doesn’t have a steep annual fee and that the cashback you earn won’t cancel out.
Rewards with the HyperJar Card
The HyperJar reward card is like a cashback credit card without the big risks.
The HyperJar reward scheme is a great way to increase your spending power. Some of their partners offer an Annual Growth Rate of 5% when you commit savings to a particular merchant, helping you to build a savings habit and get more from each pound.
With HyperJar, you also get access to huge discounts and are entered into prize draws by many merchants you spend with through HyperJar, maximising your chance to win just by saving and shopping.
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