If you play your cards right, then you can earn good money from credit cards. We reveal the cream of the cashback crop.
This article was first sent to Fools as part of our 'The Good, The Bad and The Ugly' email series.
Often, I liken credit cards to razor blades. When used properly, both are simple, convenient tools which do their job well. Alas, when used unwisely, they can cause considerable harm, and even severe injury!
The sun is shining and it's a lovely day, so I'm in a good mood. Hence, today I'm going to focus on the brighter side of credit cards. In particular, I'd like to show you how your flexible friend can earn you hard cash while you spend. (If you want to explore the darker side of credit cards, then read The Debts That Wouldn't Die!)
Capturing your cashback
First things first: cashback credit cards are only suitable for people who always pay off their monthly credit-card bill in full. This is because a typical credit card charges a yearly interest rate of around 16.5% APR, or around 1.28% a month. So, if you allow a balance to build up on your card, then the interest paid will far outweigh any cashback accrued.
(If you are paying high rates of interest on your credit-card debts, then simply transfer your existing balances to one of the dozens of cards which charge no interest on balance transfers for up to fifteen months.)
By always paying off your credit card in full, you benefit from between 45 and 59 days of interest-free credit. However, by switching to a top cashback credit card, you can also earn as you shop. Usually, your cashback takes the form of a yearly credit to your credit-card account, or a cheque sent to your home address.
Do your sums
In order to work out which cashback credit card works best for you, you need to have some idea of your monthly spending. If you want a decent estimate of your spending on plastic, then dig out a few previous statements in order to put a figure on your card usage.
Many cashback credit cards pay enhanced or bonus cashback for an introductory period, making them more valuable in the first year. Others pay higher rates of cashback on specific items, such as petrol or supermarket shopping. Therefore, the more you know about your monthly spending, the easier it will be to choose your perfect plastic.
Using The Fool's independent, unbiased credit-card search engine, I found the following table-toppers:
Best Buy cashback credit cards
(based on cashback paid in the first year)
For a monthly spend of £250:
Card | Cashback (£) |
|---|---|
Capital One Platinum Cashback MasterCard | 52.50 |
48.75 | |
32.50 | |
Egg Money MasterCard | 30.00 |
For a monthly spend of £500:
Card | Cashback (£) |
|---|---|
110 | |
Capital One Platinum Cashback MasterCard | 105 |
Egg Money MasterCard | 60 |
55 |
For a monthly spend of £1,000:
Card | Cashback (£) |
|---|---|
315 | |
Capital One Platinum Cashback MasterCard | 150 |
Egg Money MasterCard | 120 |
80 |
As you can see, Amex and Capital One bag the gold and silver medals, with Egg Money and Barclaycard finishing as runners-up. American Express credit cards often top cashback tables, but Amex is not as widely accepted as Visa or MasterCard. Thus, it might be worth having a backup cashback card on standby for when you can't wave your Amex.
Of course, to make the most of your cashback, you should heap all of your spending onto your card. For example, any bill of £3+ goes straight onto my cashback card, as does my wife's entire spending. My credit-card spending in 2008 -- including everyday purchases, regular bills and large outgoings -- should easily exceed £20,000 [gulp!]. Therefore, I'm looking forward to banking a cheque for at least £200 later this year. Easy money, right?
One final finesse -- and a warning
If you're a motorist who spends a fortune on fuel, then the Shell MasterCard may rev your engine. It offers standard cashback of 1% (on par with Egg Money), but pays a bumped-up 3% on Shell fuel purchases in the UK. With petrol and diesel prices soaring skywards, this card could bring much-needed relief for hard-pressed drivers!
Lastly, you may forfeit your cashback if you incur any late or missed repayments, or exceed your credit limit. Therefore, be sure to set up a monthly direct debit to repay your entire monthly balance. Also, don't spend more than you can comfortably afford to repay, or you'll end up a loser in the cashback stakes.