Cash Back Or Loyalty Cards?

Credit cards are often portrayed as they bad boys of banking, always tempting you to buy just one more thing, and then charging you 17 per cent interest and a late payment fee.

But it doesn’t have to be like this. If you want to get revenge on your bank manager, the best way is to get disciplined and get something back.

Self-control is the key here, and that means paying off your balance in full every month. As soon as you stop doing so you’ll start paying interest and your bank will have the upper hand again. But once you do get your finances under control you can start to get some great freebies or even cold, hard cash, just for spending money.

To do this you need to get the right kind of card. Many people take the first card that’s offered to them by their bank, but this is unlikely to be the best out there. What you need is a reward card.

Loyalty cards

Loyalty cards work by awarding you points every time you use them. These will be redeemable in different ways depending on who supplies your card. For example, if you get your credit card from a supermarket then you will most likely to be able to cash in your points there.

Other ways that your points can be redeemed include discounts on cars, free flights and money off your bills.

The whole concept of loyalty cards however, is to encourage you to spend with the company that provides your credit. Therefore, you’re likely to get more points when you spend in certain places and then only be able to redeem them in those same places, making you far more likely to spend money there too.

The fact that loyalty cards work on a point scheme can be misleading as a single point is often worth next to nothing. When you work out how much you would have to spend to accumulate enough points to get what you want, they start to look less attractive.

So, the best way to get the most out of loyalty cards is to go for one that will give you discounts on things you already spend your money on. That way, rather than spending extra because you have the points, you will be saving money by redeeming them on your weekly shopping or digital TV bill.

Cashback cards

These are the alternative reward cards. Rather than encouraging you to use your points in particular places and on particular things, they give you a percentage of your spending back, in cash.

This means that you can use your “reward” for whatever you want. You are not encouraged to spend it anywhere, or even at all – you could put it into a savings account and watch as your bank keeps on giving.

Surprisingly, cashback cards often give better returns than loyalty cards, so you should always work out the worth of any points and compare it to how much cash you could be making when comparing cards.

How to make this work

As mentioned earlier, these schemes become pointless as soon you start to pay interest on your card as anything you do get back will immediately be overshadowed by the interest payments.

So the best way to do this is to set up a direct debit to pay off the full balance of your credit card each month, which can be arranged at your bank. Once that is done, the more you put on the card, the more you will make. But don’t use this as an excuse to spend frivolously – why not pay all your bills and your mortgage with your credit card instead? Using it like a debit card but then paying it off each month will earn you loads of points or cashback.

But be careful

Watch how you use your card. Things that are classed as “instant cash transactions” such as online betting and cash withdrawals start to accrue interest immediately, so you’ll end up paying interest even if you’ve paid the balance off at the end of the month.

You also need to be realistic with yourself. Can you really be trusted to clear the balance each month? If not, then you need to find a credit card with a zero per cent period (though you might have to pay a transfer fee), or one with a low life-of-balance APR, as avoiding or limiting interest payments is the most important thing here.