Credit cards chop away at cashback deals

As mechanics tinker with a car engine to improve performance, so lenders are now doing the same with their own profit motors - your credit cards. The effects of this ferociously competitive market on margins has forced them to fine-tune customers' cashback deals, cutting the rates on offer.

As mechanics tinker with a car engine to improve performance, so lenders are now doing the same with their own profit motors - your credit cards. The effects of this ferociously competitive market on margins has forced them to fine-tune customers' cashback deals, cutting the rates on offer.

Capital One has halved the cashback on its Circle Rebate card from 1 per cent to 0.5 per cent for existing and new customers. If you spend £500 a month on the card for a year, you will now be losing out on £30.

Last month, Halifax's One credit card chopped its cashback in half for new customers, from 0.5 per cent to 0.25 per cent.

Egg cut its cashback in April, from 0.5 per cent to 0.1 per cent - one of the most miserly rates on the market. However, existing customers were offered a second "blue" Egg card that still pays 0.5 per cent cashback, although its other terms are not so generous.

What's going on?

Egg says research shows that customers prefer 0 per cent deals to cashback, but Halifax has a more realistic answer: "The credit card market has changed, and we are pricing to stay competitive," says its spokesman, Alex Barnett.

Research from the financial information website moneysupermarket.com also casts doubt on Egg's findings. It says online applications for cashback cards are up by more than 200 per cent.

Credit lenders like to categorise customers, and those who favour cashback are labelled "reward seekers". By contrast, "chasers" looking to switch their debts hare after offers of 0 per cent interest on balance transfers, and "heavy spenders" simply want a card with a low annual percentage rate (APR).

Cashback can be a great perk. "You are in effect being paid to use a product," says Stuart Glen- dinning of moneysupermarket.com. "For people who clear their debt at the end of each month, it's almost madness not to use a cashback or loyalty card."

Cashback cards pay you for the spending you rack up each month, regardless of whether you pay it off straight away or not. Watch out, though; if you are slow to clear your debt and are not on a 0 per cent deal for new purchases, the APR cost will usually offset the cashback.

Keep an eye on different cards, too, since there is considerable variation between cashback rates. A £500 monthly spend with American Express (2 per cent cashback) over a year generates £75. With Nationwide (1 per cent for the first six months, then 0.5 per cent), you would get £45, while Alliance & Leicester (0.5 per cent) would pay £30.