A cashback credit card will give you a percentage of the money that you spend on the card as cashback. This sounds great, but the percentage will be very low. It is likely that it will be less than 1% of what you spend on the card. This will vary depending on the card that you choose. Some cards will not give the reward in cash but in points or vouchers. So a supermarket credit card may give you supermarket loyalty points, which could be worth the same amount but can only be redeemed in that particular place. Sometimes you might collect vouchers such as air miles. It is worth finding out what the reward is, if it is not cash and considering whether it is something that will be useful for you.
Cashback cards used to be more easily available than they are now. Not all credit card issuers will offer one and so you may have to search around to find one. The cash back available used to be better as well and this is probably because the interest rates are now so low, banks are trying not to give too much away to customers as they cannot afford it.
The advantages of a cashback card are pretty obvious. Every time that you use the credit card, you will increase the credit card balance and then when the cashback is calculated at the end of the month, it will be higher if you spend more money on your credit card.
The cashback is usually paid in the way of a credit to the card the following month. This means that it can be used to pay off some of the outstanding balance or you can spend it automatically when you next use the card.
Some people really use it to their advantage. They will use the credit card to buy everything that they would normally buy during the course of the month. This will enable them to get a high amount of cashback. Then they will pay off all of the credit card when required so that they are not charged any interest and then they take full advantage of the card.
It may be tempting to spend more than you normally would on your credit card so that you can make more cashback. As long as you are buying things that you normally would buy, but using a credit card instead of say cash or a debit card then that is fine. However, it can be tempting to use cashback as an excuse to justify buying extra things that you would not normally buy. For example you could think that as you are getting some money back you can spend extra on clothing than you need to. However, the cashback you will get is very small and you still have to pay a lot of money for the item so rather than saving money you are actually spending more.
Unless you pay the credit card back in full each month you will actually be paying out far more than you are spending. Cashback credit cards will charge interest at a much higher rate than they give in cashback. They will also tend to charge higher interest than standard credit cards. This is so that they can cover the costs of the cashback. So if you are only repaying the minimum each month or paying anything less than the full balance owed, you will actually be paying out more than you would if you did not have a cashback credit card.
This means that you have to be really cautious. This type of credit card is really only good for those people that know that they will always repay the full balance each month/
Is it right for me?
You will know whether you are the sort of person that tends to repay the whole credit card balance each month or whether you tend to only repay the minimum or a small amount. Even if you do always repay the full balance and have a direct debit set up to do this, do make sure that you are confident that this will be something that you will always be able to do. Think about how secure your income is and whether it is likely to continue at that rate into the long term. Obviously it is hard to predict the future but you should have some idea as to how secure your job is or the other income that you are getting.
If you think that you will be tempted to spend more money on the card than normal, then it is a good reason for not having one. You do not want to spend extra money in order to save just a tiny amount as you will end up losing out. Therefore it is best to not have the card at all.
It is also unwise to have the card if you think that there is a chance that you will not be able to repay the balance. This will end up costing you a lot of money, much more than you will get in cashback and so it is better not to have a credit card at all. However, if you do want a card, then go for the one with the cheapest interest so that you spend the least possible amount on it.
If you are not sure whether the card will suit you, perhaps having not had a credit card before, then take things slowly. Think about what you expect your behaviour to be like and make sure that you have a direct debit set up to pay off the full balance. Then you have the best chance of being able to take advantage of the car rather than it costing you a lot of money.