How to choose between cashback/rewards/ 0% on purchases credit cards

A reader asked:

Should I get a cashback card or one that gives you rewards? Or is a 0% on purchase card better? I will be able to repay in full most months I hope.

The answer depends on what you want to use the card for… and if you really would be able to pay it in full every month.

When is a cashback card better?

If you repay the credit card bill in full every month then a cashback card is better than a 0% on purchases card.

Here you aren’t paying any interest at all, so a 0% on purchases card wouldn’t save you any money.

These cards used to be great, but what you get has been cut back over the last few years. Often the cashback is now very small.

But even if you don’t get much back, it’s better than nothing, providing you aren’t paying any interest on the credit card. And providing you aren’t tempted to overspend.

Is a rewards card better than a cashback card?

The big plus of cashback cards over rewards cards is you just get cash so it’s up to you how you spend it. You don’t have to think about it.

A rewards card is much the same as a cashback card except you are more limited in how you can spend the rewards.

But if a particular rewards card suits you, it can give you a bigger financial gain than cashback cards. For example, if you always shop at the same supermarket, a card that gives you points you can spend there can be useful.

The idea of air miles appeals to many people, but you may find it doesn’t always fit in with where you want to go on holiday, or there are cheaper flights where you can’t use your airmiles.

Some cards limit the sorts of spending that gets you the rewards, but others let you spend on anything. MSE, who has a good page with the latest cashback and rewards cards on offer, calls these ‘close to cashback’ deals.

So you need to look at a rewards card closely and think how useful it will actually be.

When is a 0% on purchases card better?

If you can’t be sure you will pay off the balance in full absolutely every month, a 0% purchases card will be a better choice.

Cashback and rewards cards give you only small benefits. Paying credit card interest for only a month can be a lot more expensive than the tiny gains from them.

A 0% on purchases card is a good way to buy a large item and spread the cost of repaying it. If you put a holiday on one of these cards and then repay 1/12 of the amount every month, by the end of the year you will have had a holiday without paying any interest. Then you can look to do the same for your next annual holiday.

But if you only make the minimum payments on these credit cards, you may still be paying for your holiday or that bargain TV in 20 years – this is the minimum payment trap.

But … will you be tempted to overspend?

All credit cards come with the risk of you buying more on the card than you can easily repay. Sometimes that’s a big item that perhaps looked like a bargain. But often it can be a lot of small payments – it doesn’t feel like “real money” just tapping with a contactless card.

These problems can be worse if you have cashback or reward cards. Your thinking mind knows the gain you are getting is tiny. But he instinctive part of your brain whispers “I’ll get cashback so that TV is cheaper than it looks”.

Some of these cards also have incentives to spend more:

• an introductory 5% cashback rate on up to £2,500 of spending in the first three months
• bonus airmiles when you spend £1,000 in the first three months.

If you are a few hundred under “target” you may buy something you don’t really need just to clinch that offer.

And it also applies to 0% on purchases cards. It can feel sensible, to spread the cost and not pay any interest. So you are tempted to spend more than if you had paid and not used credit.

This can be even worse with Klarna, LayBuy and Clearpay which are sold as a convenience not borrowing. In the last year, 10 million people have used these.

If you know you are the sort of person who loves a bargain and is easily tempted to shop, perhaps think twice about any of these cards? Their aim is to get you to buy more and more. You may be much better off of you say No and pay using your debit card for everything!

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