Steve Lodge looks at the latest special offer in the credit war
Never mind points and product discounts, you can now get cash rebates for spending on a credit card. Alliance & Leicester, the converting building society handing out its free shares next month, last week launched a credit card offering cash rebates worth up to 2 per cent of the amount you spend.

The A&L describes its Money Back card, the first of its kind in the UK, as offering the "ultimate reward scheme", and the move is expected to set off a new wave of credit-card competition.

The card looks particularly attractive for people who pay off their bills in full each month; for them the offer amounts to free money because the card also carries no annual fee and has the usual interest-free period.

"You can't fail to say it's a good deal. [For cardholders who never pay interest] it's something for nothing," said one competitor.

The A&L says the rebate, payable once a year by cheque in January, will be worth pounds 43 for a typical cardholder spending pounds 3,650 this year, pounds 106 for someone spending pounds 6,800.

The rebate is 0.5 per cent for annual spending of up to pounds 3,000, 1 per cent for any spending over this. But for this year only the rebates are doubled to 1 and 2 per cent, respectively.

The card is available to anyone but the society really hopes to attract people who run up credit-card debts. The interest rate on bills that are not paid off is 17.9 per cent - which is reasonable if not outstandingly competitive, even taking into account the cashback. Debts transferred from other cards also earn the cashback but are charged a lower interest rate of 12.9 per cent.

The A&L says it has chosen this type of card because it had to do "something different" to attract customers in an already competitive market and because its research said cardholders were "tired of gimmicks" such as points schemes.

The underlying value of the benefits from some of these other schemes can amount to more than the cashback of up to 2 per cent on offer from the A&L, as our table shows. But in practice only a third of people who earn points redeem them, according to research by People's Bank UK, which offers a no-frills, no-fee card with an interest rate of 14.4 per cent. With the A&L card, by contrast, everyone will be sent their cashback cheque annually to spend on whatever they like.

Furthermore, many of these other incentive schemes are only available on cards that carry annual fees; the A&L card is free.

In addition, there is nothing stopping supermarket loyalty cardholders from using the A&L card in combination with their loyalty card - "double dipping".

The A&L denies that the launch of the card was aimed at disproving the theory that societies which converted into banks would offer relatively uncompetitive products. Indeed, even though the society is hoping to attract interest-paying cardholders, the move is likely to be particularly important in increasing the competition for the half of all cardholders who pay off their bills in full. For these people, the lower interest rates offered by many no-frills cards recently are irrelevant. But there are limits to what these full payers can expect.

Card issuers earn their money from three sources: annual fees, interest, and a commission from shops and other merchants which take their cards. If there is no fee and the cardholder pays no interest, the card issuer's only income is the commission. This can come to around 1.7 per cent of the amount spent, out of which the issuer also has its costs, including funding the interest-free period that most cards have.

One competitor questioned whether the A&L would be able to make any money precisely because its deal is likely to attract a disproportionate number of people who would never pay any interest. Some people's cashbacks - at least in the first year - could amount to more than the 1.7 per cent commission.

But while the A&L card looks a great deal for those who pay off their bills in full, those who use their card to borrow are likely to be better off with no-frills, low-interest rate cards. Two of these, Capital One and RBS Advanta, are currently charging a special introductory rate of just 9.9 per cent until next January, on both new purchases and debts transferred from other cards.

Alliance & Leicester, 0500 838383; RBS Advanta, 0171 600 7844.


Credit card Incentive Value (as %

of spending)

A&L Money Back Cash 0.5 to 2%

American Express 1 Membership miles (flights, hotels) 2 to 2.7%

Barclaycard 2 Profiles points (catalogue of goods) 0.3 to 0.5%

BA Executive Club 3 Air Miles 0.75 to 2.8%

Goldfish(British Gas) Discounts on gas bills, spending 1%

in Boots and Asda

NatWest 3 Air Miles 0.6 to 2.5%

Sainsbury's Bank Reward points 1% 4

TSB Trustcard Plus points (various discounts) 0.2 to 0.25%

Cards are free unless indicated: 1pounds 20 annual fee; 2pounds 10 annual fee; 3pounds 12 annual fee. 4Holders of loyalty cards get double points for spending in Sainsbury's

Source: Prof Steve Worthington, Staffordshire University