Don't let the crunch steal Christmas. Here's an easy way to earn cash as you shop, both now and in the years ahead.
This article was first sent to Fools as an email in our 'Afternoon' series.
Earlier this year, I had something which is said not to exist: a `free lunch'. What happened was my credit-card company paid me more than £200 for using its plastic over the past year. "Er, surely some mistake," I hear you say, "because credit cards charge interest and fees, right?"
Usually, you'd be correct, but there is a way to be paid as you spend. It's called a cashback credit card, and it's one of my very favourite financial products. With a cashback credit card, you earn cash on your purchases, usually at a rate of 0.5% to 1% of their value. So, spend £100 on your plastic and you earn a rebate of 50p to £1.
It really is as simple as that: by taking a cashback card shopping, you can turn a profit as you spend. Think of it as an extra discount of 1% or so on top of the large markdowns that retailers are forced to offer these days. Usually, your cashback arrives in the form of a yearly cheque or credit to your card account. For the record, I receive a cashback rebate of over £200 a year, which means that I'm spending more than £20,000 a year on my plastic. Yikes!
So, by putting all possible expenses on my credit card, from the smallest to the largest, I have pocketed over £600 of `free' money in the past three years. Also, I get a comprehensive record of all my spending in one monthly statement, which helps me to budget.
According to the Fool's independent, unbiased search engine, there are nine different cashback credit cards currently available (listed alphabetically):
Cashback credit cards
| Card | Cashback | Interest rate on purchases (% APR) |
|---|---|---|
| American Express | 5% cashback on spending up to £4,000 in first three months. Thereafter, 0.5% on the first £3,500, 1% on £3,501 to £10,000, and 1.5% over £10,001. | 18.9 |
| Abbey Credit Card MasterCard/Visa | 3% cashback on spending at supermarkets and petrol stations; maximum £12.50 a month for first six months. | 18.9 |
| Egg Money MasterCard | 1% of all spending; minimum cashback must exceed £5 for payout. | 12.9 |
| Smile Classic Visa | 0.5% on all spending. | 20.9 |
| Smile Current Account Customer Classic Visa | 0.5% on all spending. | 16.9 |
| Bank of Ireland (UK) Moneyback Gold MasterCard | 0.5% on spending up to £15,000. | 17.9 |
| Bank of Ireland (UK) Moneyback MasterCard | 0.5% on spending up to £15,000. | 17.9 |
| Barclaycard OnePulse with Cashback Visa | 0.5% on monthly spend of up to £6,000; 5% cashback on Transport For London spending. | 14.9 |
| First Trust Bank (NI) Visa Option 1 | 0.5% (£25 paid on first £5,000 of spending, with 0.5% paid on each further spend of £200). | 18.9 |
Source: Fool.co.uk; data correct as at as at 16/12/08
As you can see, six of these cards pay standard cashback of just 0.5%, which excludes them from a Best Buy rating. For straightforward cashback of 1% on all spending, the Egg Money MasterCard gets the bronze medal. However, it is beaten by the Abbey card, which pays out £75 on spending of £3,000. Alas, Abbey's cashback offer ends after six months, so it gets only second place.
Thus, the best cashback card on the market is the American Express Platinum Cash Back Card, which takes the gold, thanks to its ultra-high introductory cashback, plus up to 1.5% cashback on future spending. But be warned: Amex is not as widely accepted as MasterCard and Visa, so it may be wise to have a back-up cashback credit card in reserve. Also, this Amex card requires a minimum income of £20,000 a year, so not everyone will qualify for it.
Three cunning card tricks
1. Never, ever borrow on a cashback card, as the interest you'll pay will massively exceed your cashback reward.
2. By making purchases just after your statement date, you can enjoy up to 59 days of interest-free credit. Just be sure to pay off your bill in full every month.
3. Paying by credit card gives you extra legal protection if goods fail to arrive, are damaged and so on. Learn more here.
Compare credit cards with Fool.co.uk