Do Cashback Schemes Actually Pay You?
Cashback cards, rewards schemes and points programmes are genuinely valuable to disciplined users and mildly costly to everyone else.
The arithmetic
A cashback rate applied to spending you would do anyway is a real return.
The same rate applied to spending you would not otherwise do is a discount on an unnecessary purchase, which is a net loss.
Any interest paid on a balance overwhelms any cashback earned, since reward rates are a fraction of interest rates. A rewards card carrying a balance is a loss-making product.
The costs to net off
Annual fees, which need dividing by your actual spending to produce an effective rate.
Minimum spend requirements for the headline rate, which push spending upward.
Caps on earnings, above which the rate falls or stops.
Category restrictions, where the advertised rate applies only to some spending and a lower rate applies elsewhere.
Foreign transaction fees, which frequently exceed the cashback on overseas spending.
Points schemes
Points have no fixed value. Their worth depends entirely on what you redeem them for, and redemption rates vary widely between options.
Travel redemptions frequently give the best rate and come with availability restrictions that make them harder to use than the marketing suggests.
Points can be devalued unilaterally, and schemes do this. Accumulating a large balance carries that risk, so redeeming periodically is sensible.
Expiry rules catch people, particularly on schemes requiring activity to keep the balance alive.
Stacking
Cashback portals, card rewards and retailer schemes can sometimes be combined on one purchase.
Portal payments are frequently slow and occasionally do not track. Treat them as a bonus rather than counting on them.
Supermarket and retailer schemes
Loyalty pricing, where members pay less than non-members, has become the dominant model in some markets. This is a discount for participation rather than a reward.
The trade is data about your purchasing, which is worth considering explicitly rather than by default.
Points earned on retailer schemes are frequently worth more when redeemed against partner offers than against the retailer's own goods, though the partners may not be things you want.
Check expiry, since retailer points commonly lapse and the notification is easy to miss.
The behavioural cost
Rewards work commercially because they change behaviour, which is the opposite of what makes them profitable for you.
Minimum spend thresholds, bonus categories and progress toward a redemption all encourage additional purchasing.
The test is whether your spending in a rewarded category has risen since you started earning on it. If it has, the scheme is working as designed.
The discipline that makes it work
Pay the full balance every month by direct debit, without exception.
Do not change what you buy to earn rewards.
Set the direct debit for the full statement balance rather than the minimum, since the minimum is what turns a rewards card into an expensive loan.
Review annually against the alternatives, since introductory rates lapse and better products appear.
General information rather than financial advice.
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