Time to play your credit cards right

By Martin Lewis, April 7, 2011

The Budget may have relieved a little petrol-price pressure, but £1.33 per litre is still not that cheap.

However, there is a brand new way to cut 1.5 per cent off all petrol and supermarket spending. All you need do is manipulate a new piece of plastic in the right way. As the name suggests, cashback credit cards don't reward you with points; instead you earn cold hard cash, tax-free, every time you spend on them. Cash is the most flexible reward possible - it is universally accepted and easy to compare who gives the most.

● The golden rule

Before I write another word, let me slam on the emergency brakes. You should only ever pick a card for its cashback if you always pay your credit card bill off in full each month, so you never pay interest.

The best way to pay is to set up a direct debit to do it automatically. If you are not going to, please stop reading now as this is not for you.

I do all my spending, where possible, on credit cards

If you do repay in full, effectively these cards pay you to spend on them. To maximise the gain, do all your normal day-to-day spending on it, instead of debit cards or cheques or cash.

● The top cashback cards

All these cards require a credit score, and with cashback cards this means you will need a good credit history.

In other words, a decent income and no defaults or county court judgements against you –- although, even then, there is no guarantee.

● New petrol and supermarket 1.5 per cent cashback

The brand new MBNA American Express pays you 1.5 per cent cashback (£1.50 for every £100 you spend) at all major petrol stations and supermarkets.

These include Asda, Tesco, Sainsbury's, Morrisons, Waitrose and Ocado. On all other spending, it is 0.75 per cent cashback.

It is worth noting that the way it knows you are in the petrol station or supermarket depends on the retailer ID code. Occasionally, you will earn 0.75 per cent at somewhere you expected to earn 1.5 per cent, but this will be rare –- most major forecourts and supermarkets should be fine.

If you are thinking that American Express cards are not universally accepted, you would be right. Visa and Mastercard are taken pretty much everywhere (with the exception of the Olympics, which is Visa only). Yet some smaller retailers refuse to accept Amex, as it charges them higher rates (which is what enables it to pay more cashback).

If that bothers you, the alternative is MBNA's Visa card, which pays 1.25 per cent on supermarket and petrol station spending and 0.5 per cent on everything else.

To show the impact, someone who spent £300 each week, roughly half on fuel and food and the other half on other spending, would get £175 a year cashback (£137 on the Visa) - pretty sweet considering all you have done is put a different piece of plastic in your pocket. A final reminder of my golden rule: repay these cards in full each month or you pay a costly 18.9 per cent representative APR.

● Five per cent cashback on everything for three months

The American Express Platinum gives a huge five per cent cashback on all purchases for the first three months up to £2,000, or up to £100 cashback. After that the cashback is tiered at up to 1.25 per cent but you must spend quite a lot to get to that. It is also 0 per cent interest on spending for six months.

All that means that its major strength is when it is used for large one-off purchases. After the first three months, it only beats MBNA for big spenders or people who buy little food or fuel.

Once the 0 per cent deal ends, it jumps to 19.9 per cent representative APR. Your annual household income must be more than £30,000 to get the card. These are just the start. There is a range of other Amex and non-Amex cashback cards that provide different rewards; for full info go to www.moneysavingexpert.com/cashbackcards

● You get extra consumer protection too

All credit card spending is covered by Section 75 of the Consumer Credit Act 1974. Buy something costing more than £100 here or abroad and the card issuer is equally liable if something goes wrong - protection you don't get on debit cards or cheques.

If the company you bought from goes bust or you have problems returning something you bought abroad, you are within your rights to go to the credit card company instead. You don't even need to go to the retailer first.

People are often surprised when I tell them that I do all my spending, where possible, on credit cards, but add up this protection and the cashback and it is a no-brainer - provided you set up that direct debit of course.

Last updated: 12:01pm, April 7 2011