Christmas shopping in a cashback wonderland: The credit cards that reward people who clear their debts each month
Sunday 19 November 2006
You can give yourself a present this Christmas. Over 80 "incentive" credit cards are on offer in the run-up to the festive season, many with cashback on all purchases.
Every pound you spend on these cards is totted up at the end of a year and a proportion of that total - usually 0.5 to 1 per cent - is returned to you by way of a cheque or credit.
In a recent survey by card provider Morgan Stanley, perks such as cashback were found to be the prime consideration of nearly a third (29 per cent) of cardholders who had switched or were considering switching their plastic - up from 7 per cent in last year's annual survey.
This change of heart is partly down to more people paying their balances off in full each month, so they can look beyond the rate of interest charged by the card provider.
Figures from Apacs, the payments body, suggest that 59 per cent of cardholders cleared their debt every month last year - up from 56 per cent in 2004.
There are some real benefits available to "non-borrowing" cardholders. For example, near the top of the "best buy" tables of both Moneyfacts and price-comparison website Money- supermarket.com sits Morgan Stanley's Platinum Cashback card. This offers "triple" cashback from the day you open the account to 1 February 2007. Over the festive season and all through the January sales, you will get 3 per cent back on the first £2,000 of purchases and 1.5 per cent thereafter up to your personal credit limit. So put £2,500 of Christmas purchases on the card and you would receive £67.50.
But if you're one of the remaining 41 per cent who carry a balance on their credit cards, you shouldn't even be considering a cashback deal, says Andrew Hagger of financial analyst Moneyfacts. "For these customers, finding the cheapest rate or taking an initial 0 per cent deal should still be the first consideration. You have to spend a fair amount to receive any significant cashback, and the monthly interest you pay with a balance will wipe it out anyway."
Equally relevant is the old adage that you don't get something for nothing, and there are several snags with cashback credit cards.
First, the initial rate of cashback usually applies only up to a certain spending cap. "Card providers offer 'teaser' deals to get customers interested for the first purchases, and then reduce the rate," says Robert Kenley, head of credit cards at Moneysupermarket.com.
"For example, the Yorkshire building society Classic card offers 1 per cent cashback on the first £2,000, but if you spend more than this during the year, the level is reduced to 0.5 per cent [on the rest]."
Some cards impose a minimum you must spend before the benefit kicks in. Lloyds TSB Platinum offers 1 per cent within the first three months of the account opening - but only if you spend over £250 in this time.
Although it is unlikely to worry many Christmas shoppers, a spending cap can also apply. Morgan Stanley's card stops paying cashback on purchases that take your balance over £20,000.
And there are very few cashback credit cards that offer introductory 0 per cent interest for any significant period.
"The maximum will be six months, which is pretty poor by today's standards," says Mr Kenley.
Those that do come with a six-month interest-free period are Yorkshire's Classic Visa card and the MasterCard from Leeds building society, which pays 0.5 per cent in cashback on all purchases made.
As card providers rein in their generosity, balance-transfer fees are becoming common on 0 per cent deals. Yorkshire's Classic Visa charges 2 per cent on balance transfers, with a cap of £50.
Bear in mind also that cashback applies only to new purchases made, not the balances carried over, and that the interest rates on cashback cards are generally not as competitive as those on standard cards.
A warning to all cardholders: try not to take cash out of the wall on any credit card. The average APR on a withdrawal is a hefty 21.27 per cent, according to financial advice website Moneyexpert.com, with only 11 providers charging under 15 per cent. The average minimum fee for a single withdrawal, says Moneyexpert.com, is £2.60.
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