Cash back credit cards are one of the latest crazes to sweep the personal finance industry. Where once balance transfer offers held sway, with card issuers falling over each other to offer the longest 0% deal in history, it now seems that cash back is king. Banks are increasingly locked in competition to provide the best cash back deal on the market - but what exactly is this feature, and why would you want it?



The basic premise behind cash back cards, as the name suggests, is that you are credited back with a small percentage of everything you spend using the card. This money will accrue on your account, and usually be paid yearly either by personal cheque or by direct refund to your account.

The actual concept of these cards is by no means new, but what's different nowadays is the size of the cash back percentage on offer. In previous offers, a cash back rate of 0.25% was considered generous - after all, it was seen as money for nothing (however misguided that view). Today, that figure looks decidedly miserly.

It's far from uncommon to see cards offering a standard rate of 1% cash back, which for heavy card users can easily add up to a tidy sum over the course of a full year. There is however a new and welcome trend towards offering higher introductory rates which in some cases have hit 5% for the first few months. Think about how great this offer really is - effectively a 5% discount across the board on everything you spend at any store or on any web site, lasting for a period of three months or more. Could you take advantage of this?

What's more, you can really boost your cash back earnings potential if you shift your regular spending such as groceries, fuel, and energy costs onto your card, although you should check if your particular card has any restrictions on what kind of spending qualifies for cash back. In particular, some cards specifically exclude payment of utility bills from their cash back calculations.

So far so good, but surely there's a catch? Of course, as the card issuers aren't going to simply give their money away, are they? They're banking on the fact that most customers will go on a spending spree when they first get their card, racking up a debt which won't be cleared in full and so will begin to attract interest. With interest charged in double figures in most cases, it's easy to see that any cash back earnings will be more than canceled out if you rack up a balance.

The ideal way to take advantage of cash back offers is to use the card only for spending which you can clear in full on your statement date so as to avoid interest being imposed. Ultimately, you should be using your card purely as a payment option rather than as a means of borrowing, and not spending anything you can't afford to repay.

Used sensibly but frequently, cash back cards really can transfer money directly from the banks' accounts to your own, so shouldn't you be grabbing a slice of the action?