• Always spend on a credit card
• BEST BUYS: Top Cashback Cards
• Use the card for all spending
• Plus extra protection on all spending
• Beware cash withdrawals and balance transfers
• Calculator: How much will you earn?
• Discuss/Ask a Question

Cashback credit cards are the best way to spend

Cashback credit cards are a form of reward scheme, yet rather than giving points or bonuses, you get cold hard cash, tax-free, every time you spend on the card. And as cash is totally flexible - you can spend it on anything - and easy to compare, for almost everyone it comes up trumps.

Yet before beginning, it's important to follow....

Always set up a direct debit to pay the card off in full each month, so you'll never pay interest, otherwise that more than wipes out any gain.

The reason card companies offer cashback or any reward scheme is simple, they want to encourage you to spend on the card so they can earn interest from it. The interest cost of all cashback cards dwarves the cashback you'll earn.

Therefore before applying for a cashback card answer these two questions...

• Are you sometimes unable to repay cards in full? If you can't repay in full every month, instead focus on a card with a lower interest rate instead, see the 0% Spending Credit Cards guide.

• Do you have existing credit card debts? Here you'll save more money by keeping them cheap, than going for cashback. And as applying for any financial product has a minor credit score impact (see the Credit Rating guide), ensure they're sorted out before applying for a cashback card - see the Best Balance Transfers guide.

The easy way to pay off in full.

The best way to pay off in full each month is via a Direct Debit, which unlike a standing order, allows the card company to take a variable amount each month to correspond with what you owe it (see the Direct Debit guide for more).

Sadly a few card providers deliberately miss the 'pay off in full' option off their Direct Debit forms, as it means they'll make less money; if that happens just write in 'pay off in full' and send it in. The rules mean they should honour it, though do call up after a week or so and check it's in place.

Once this is done, your credit card has effectively become a Debit card, yet one that pays you every time you spend on it. While they don't like it, credit card companies don't lose money as they charge retailers every time someone uses one of their cards. In many ways using this technique, you're effectively claiming much of that retailer's fee for yourself.

Get more free cash from credit card companies.

Credit card companies throw serious cash at marketing in order to get their cards in our pockets. For those who don't need to borrow it's possible to ride this wave of freebies to be quids in. There are two other ways to make money from credit cards.

• Stoozing. This is an advanced technique where you can make serious cash. It takes advantage of the fact that many credit cards will lend you money for a short time at 0% interest. If you take that money and save it in a high interest account you'll be quids in. See the full step-by-step Stoozing guide.

• Credit Card Freebies. Many credit cards offer incentives like free flights or electronic goods for you to sign up to the card. Therefore if you've a good credit score, just take advantage by signing up even if you don't want the card. A full list of what's available is in the Credit Card Freebies guide.

BEST BUYS: The UK's Top Cashback Cards

Over the last few years, the number of cards offering cashback deals to new cardholders has diminished rapidly, yet it's still possible to get a serious whack. The benchmark rate is 1% cashback (1p per £1 spent); any card paying more is a serious contender. Which card wins depends on how much you spend on it and its acceptibility.....

The Overall Winner: Amex Platinum

Pays 5% cashback for 3 months, then up to 1.5% after

The American Express* Platinum Moneyback card pays new cardholders an unbeatable 5% cashback, 5p per £1 spent, for three months up to a maximum of £4,000 spending (£200 cashback earned). After that its rates are tiered depending on how much you spend, up to 1.5% cashback.

It's worth noting though that while Amex is accepted at most high street stores and big chains, as its charge to retailers is high, some small restaurants and independents don't accept it. See the who takes Amex? forum discussion. Yet with such mammoth cashback, even with this it'll still usually outpay other cards over a year. Plus MoneySaving nerds can do what I do and holster a back-up non-Amex cashback card for just such occasions.

• Quick Tip 1: Time your application.

  The super-high rate only lasts three months, so try and time the application, which usually takes around three weeks, so the 5% rate coincides with a period of high spending e.g. if you're moving house, or in late Sept. so it covers the Christmas period and January sales. In the meantime use another cashback card (see below).

• Quick Tip 2: Use a joint card

  If you're in a relationship and trust each other, maximise the gain by both applying for a card at staggered periods. E.g. Janet applies for the card and makes John a second cardholder so they both get 5% cashback for three months. After that John applies for the card and makes Janet the second cardholder to get another three months at 5%. There's no guarantee the offer will still be available then; but you've lost nothing by trying.

  After that period continue to just use one person's card, as joint cardholders, as with the tiered rate structure this also increases the cashback.

  Quick Stats: Intro Cashback. 5% for 3 months on up to £4,000. Standard Cashback. 0.5% on up to £3,500/year, 1% on £3,500 to £10k/year and 1.5% above that. Min. Salary Requirement: £20,000 Maximum cashback/year: NO MAXIMUM

The Non-Amex alternatives

• Abbey (Mastercard). Pays 3% cashback on food and fuel for 6 months

  A different type of offer is available on the Abbey credit card. It pays new cardholders 3% cashback on purchases from supermarkets and petrol stations, for the first 6 months, up to a maximum of £12.50 per month (so £75 in total). Put simply, you get £3 back for every £100 you spend, up to £417 spending per month.

  The participating supermarkets are Asda, Morrisons, Sainsbury's, Somerfield, Tesco, and Waitrose and the petrol stations taking part are BP, Esso, Shell, Texaco, Asda, Morrisons, Tesco, Sainsbury's and Waitrose.
  
  However, it's important to note that, apart from the 3% deal, no other cashback is available on this card. Therefore, if you spend over £417/month, spend anywhere except the named supermarkets and petrol stations, or spend after the 6 month intro period, this earns no extra cashback.

  Quick Stats: Cashback Rate. 3% on supermarket/petrol spend Min. Salary Requirement: NONE Maximum cashback/year: £75 in first 6 months

• Egg Money (Mastercard). Pays a flat 1% cashback but universally accepted

  Alternatively, the Egg Money card which pays a flat 1% cashback on everything you buy. However do be careful not to confuse this with the standard Egg card, which used to give cashback but gradually cut it out.

  Like Abbey, this is more widely more accepted than Amex, and those earning under £20,000 a year can apply, though the annual cashback is capped at £200 (so you'd have to spend over £20,000 before it's an issue).

  Quick Stats: Cashback Rate. 1% on everything, more on some special linked offers Min. Salary Requirement: NONE Maximum cashback/year: £200

For a few people these cards can be beaten by specific use rewards schemes, such as British Airways miles on its Amex cards or Nectar points on some credit cards, yet for most cash wins due to its flexibility. For more see the Credit Card Rewards guide.

Use the card for all spending

Once you set up a credit card, every time you use it you get paid. While this isn't an excuse to 'spend more' it does mean from now on...

Use the cashback for ALL normal spending, replacing cash, cheques, and other debit, credit & charge cards.

For those who have work expenses they need to reclaim, this can be a powerful way to earn more, at no cost to you, provided you can cope with paying the bill in full each month.

Yet do beware of setting up regular payments from it, or any other credit card, though. These are technically called recurring payments and unfortunately, unlike standing orders or Direct Debits, once set up you can't cancel them, only the company you're paying can. If you're in dispute, this can be a nightmare (see the Recurring Payments guide for more).

There's extra protection on all spending too...

There's another big bonus to using a cashback card, you actually have far more consumer protection. This all comes about due to what's called Section 75 of the Consumer Credit Act 1974 which says...

75. — (1) If the debtor under a debtor-creditor-supplier agreement falling within section 12(b) or (c) has, in relation to a transaction financed by the agreement, any claim against the supplier in respect of a misrepresentation or breach of contract, he shall have a like claim against the creditor, who, with the supplier, shall accordingly be jointly and severally liable to the debtor.

Which of course, reads like gobbleydegook... yet in a nutshell means

Buy something costing over £100, here or abroad, and pay on a credit card, and the card issuer's equally liable if something goes wrong.

Now this protection only applies to credit cards, not debit cards or any other plastic and it's hugely important, especially in the current credit crunch climate. It means order something and if the retailer went kaput, you'd still be able to claim your money back from the card company. Read a full article on Section 75 refunds

Beware cash withdrawals and balance transfers.

It's important to understand, you only earn the cashback when you spend on it, other transactions don't apply. Worse still there can actually be nasty consquences for doing anything other than spending on a cashback card.

• Never use cashback cards for withdrawing cash.

  Withdraw cash and you'll often be charged a fee, plus even if you pay the card off in full you'll usually be charged heavy interest. The rule's simple: never, ever, ever use these cards for cash withdrawals.

• Never balance transfer on a cashback card

  It's no coincidence that many cashback cards have top balance transfer offers – they want to tempt you to both spend on the card and shift debts to them. This is because your monthly repayments are automatically allocated to repay cheap balance transfer debts first, leaving the much higher interest from spending debts expensively trapped until all the cheap debt's repaid. In other words you can't 'just pay off the costly debts from spending'.

  By far the best thing to do is use separate cards for earning cashback and balance transfers (see the Balance Transfers article).

Work out what you'll earn

Spending on a cashback card and paying it off in full far outstrips using a debit card, you can make £100s/year by using the right one.

Plug in how much you're likely to spend, and whether or not you're new to my top pick Amex Platinum card into this special calculator, and it'll work out how much cashback you'd make, for free, over a year.

Do remember though, this is just for the top player, Amex Platinum. If you go for either of the 1%-paying alternatives, you can work out your annual cashback by dividing the amount you expect to spend by 100