There’s no doubt that credit cards are useful financial products. They allow you to shop conveniently – both in-store and online – with the added protection of Section 75 of the Consumer Credit Act. Some also offer extra benefits in the form of reward or cashback schemes. In this article we look at:
- Credit card reward programmes
- Cashback credit cards and how they work
- Who pays for credit card reward schemes
If you’re thinking of taking out one of these cards, there are two things to remember. First, you should take account of the monthly/annual fees to see if it’s worth your while. Secondly, if you don’t pay off your credit card balance in full every month, the financial benefits from reward schemes might be swallowed up by the payment of interest charges and other fees.
What are credit card reward programmes?
Many card issuers offer a reward scheme as an incentive for its holders to spend more. Depending on the value of each purchase cardholders make and what it is, they accumulate points. These points can be redeemed and converted into vouchers which can then be used in shops, airlines, hotels, etc.
In effect, cardholders are being rewarded for the spending that they would have done anyway. The only negative is if they spend more just to earn more points. The reward programmes on offer vary from provider to provider so that each point might be worth 50-75p, or it might be the equivalent of 3p.
How do cashback credit cards work?
Some credit card providers offer a cashback scheme. Instead of points, a percentage of the money holders spend is returned to them in the form of cash. This might be paid monthly or annually. With some cashback schemes, the money earned is offset against their credit card bill while others pay the cash into a separate bank account or allow it to be converted into vouchers. The amount that is returned with cashback programmes vary. Some cards have an introductory offer which is significantly higher, but which drops after 12-24 months.
A credit card issuer might pay a flat rate – no matter how much and where it is spent. Other cashback programmes have different rates according to where the card is used. Finally, a scheme might have tiered rates where cardholders can earn a larger percentage on their spend if it exceeds a certain amount. Most schemes have a cap on how much can be earned through cashback schemes. Certain credit card transactions are exempt from cashback schemes. These include:
- Cash withdrawals.
- Balance or money transfers.
- Mobile phone top-ups.
- Purchase of foreign currency.
Who pays for credit card reward schemes?
When purchases are made by credit card, card issuers charge businesses and retailers a fee of 0.1-0.3% of the value of the purchase. As most UK companies don’t impose a surcharge for card payments, they include the cost of credit card fees in their overheads. In effect, all consumers – however they pay – pay for the cost of reward schemes in the form of higher prices. The fees collected can then be used by card issuers to cover the costs of their rewards programmes.