What’s the difference between a cashback and a rewards credit card?
Cashback cards, instead of (or sometimes as well as) earning points for rewards, give you money back (or some kind of cash equivalent, such as a travel voucher) on your spending. Put simply, this means you save money on your expenses, usually for a limited time.
Do they all work the same way?
The most straightforward cashback credit cards pay back in cash either a fixed percentage (e.g. 10%) on all purchases made with the card, or a fixed amount of cash for reaching a specified spending target (e.g. $200 for spending $4,000). However, the cashback amount is almost always capped. E.g. a 10% cashback might be capped at $100.
There is also usually a time limit on when you can earn cashback, for example only in the first three months after card approval. (The ING Direct Orange One Platinum Credit Card is an exception to the time-limit rule, since cardholders can continue to earn cashback every month.)
Other cashback cards may award an annual travel voucher (e.g. a voucher worth $400) to be spent with a particular airline or with a travel agency operated by or affiliated with the card issuer. This is a particularly valuable kind of cashback for regular travellers, since it is awarded every year and the amount may totally offset the card’s annual fee.
Yet another form of cashback is an annual free return flight with the airline affiliated with the card for the purpose of earning frequent flyer points.
Finally, a card may offer to refund the annual fee every year to cardholders who reach a specified spending target (e.g. $6,000) during the year.
How much cashback can I expect to earn?
Cashback paid in cash is usually limited to a few hundred dollars at most. Cashback paid in travel vouchers or travel credit or annual fee refund may vary from around $125 up to the value of a relatively long domestic return flight (e.g. Sydney to Perth).
Is there a cap on how much is paid back?
Cards delivering a cashback in the form of a percentage rebate on purchases will almost always have both a cap on the amount of rebate that can be earned and a limit to the time during which cashback can be earned.
Can I earn cashback on balance transfers, cash advances and travellers’ cheques?
Cashback is only applicable to eligible purchases. Cash advances, buying foreign currency and travellers’ cheques, balance transfers and gambling payments do not earn any cashback.
Can the money be used to reduce an outstanding balance or pay for the annual fee?
Yes, quite often you can use it to pay off the outstanding balance or the card’s annual fee.
What’s the best way to use a cashback card?
As with any other credit card, pay off your card balance in full and on time every month, otherwise the interest and late fees you pay on the outstanding balance will reduce the true value of the rewards.
What other factors should I consider while selecting a cashback card?
It is very important to look at all the features of cashback credit cards before applying to make sure the deal will be genuinely beneficial:
- Annual fee: Calculate your estimated cashback and compare this figure with the annual fee. If the annual fee is greater, then you are not going to get any benefit from the card.
- Interest rate: Cashback credit cards often feature a relatively high interest rate, which is applied to any outstanding balance on your account. If for any reason you are unable to pay your monthly bill in full, a high rate could quickly negate the savings you make on the cashback.
- Rewards points: Many cashback credit cards also offer ongoing rewards points or frequent flyer points on purchases.
- Introductory offers: Some cashback cards offer a large quantity of bonus rewards or frequent flyer points as well as cashback for reaching a specified spending target within the first two or three months after card approval. (E.g. 50,000 frequent flyer points plus $100 cashback for spending $2,000 in the first three months.)
- Balance transfers: These cards also often feature the option to transfer a balance so you can repay your existing credit card debt at a lower interest rate, or even 0% interest. You should be aware that balances transferred do not earn any cashback, and if your priority is repaying your debt, you are probably better off choosing a different type of card with a better balance transfer deal.
- Restrictions and penalties: As well as placing a cap on the amount of cashback, banks usually impose restrictions on the type of spending that is eligible, excluding all cash equivalents such as cash advances, buying foreign currency and travellers’ cheques, balance transfers and gambling payments. There will also be penalties for missing payments or paying late. Study all the terms and conditions to ensure you can get the best return.