Credit card cashback – the way to bigger debts?
07/09/2007
The credit card market always seems to be in competition with itself to gain more customers. First, there was interest-free credit. Then, along came personalised credit cards, which could be designed to include football club logos or famous scenery. Now, it is all about cashback.
This week, Abbey launched a credit card which offers customers five per cent cashback on the first £1,000 of their supermarket shopping. The deal represents the biggest cashback amount on the market. However, are such offers truly good deals or are they leading customers into large debt problems?
As many as one-in-ten credit cards on the market now offer customers cashback on purchases. The average cashback offered on the cards, however, is 0.72 per cent, according to research from Money Expert.
While many offer small amounts of cashback, the launch of Abbey`s five per cent card is a sign that the market may be about to step up the pace.
Andrew Hagger, of Moneyfacts, told the Telegraph: "If Abbey consistently delivers deals that appeal to the mass market, for instance on shopping or petrol, then the card could well build up a reputation as a good one to opt for if you`re looking for cashback."
However, as with most aspects of the credit card, fears of surging debt problems put many off entering the market while those that do often have a large debt as a result. The temptation to get cashback with purchases, at the customer`s favourite store or supermarket, could add to the record national credit card debt.
Statistics from Credit Action show that the total national credit card debt for July 2007 was £53.5 billion, with an average interest rate per credit card of 17.27 per cent. As the national debt grows, so does missed repayments. More than 4.1 million credit card bills were not paid in the first six months of 2007, with each missed bill accruing a £12 charge.
Earlier this year, the industry regulator, the Office of Fair Trading (OFT), ruled that charges on missed credit card payments were "unfair" and capped them to £12. The OFT has also said it would look into complaints that interest rate calculation methods by credit card companies are "unbalanced".
However, despite the clamping down on other parts of the market which may harm consumers, there has yet to be any directive over the implementation of cashback by the OFT. This has led some to speculate that the temptation of cashback schemes may create bigger debt problems.
Keith Smith, of the London School of Business and Finance, said: "A cashback credit card is worth considering if and only if you pay off your outstanding credit card bill in full each month. If you don`t clear your credit card debt then any cashback you earn will be more than outweighed by the interest charges you incur."
While the cashback on offer from Abbey and others looks tempting, giving in to the temptation could lead to serious debt problems in the future.
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