Cashback Schemes and Balance Transfers

To begin with, cashback credit cards and reward cards with other benefits, such as Air Miles earned for every pound you spend, tend to attract a higher interest rate than credit cards which do not offer you this feature. If you are therefore transferring debt which may remain on your credit card after any introductory balance transfer offer ends, then it would be prudent to shy away from a credit card with a cash rebate or similar cheme, as it would be likely that the standard interest rate (charged after the offer expires) will be higher than opting for a 'no frills' low interest credit card.

If you transferred a balance onto one of these cards, you would end up paying a much greater amount of credit card interest than you would if you kept the balance transfer separate from the rewards. This is because of the order of payments on credit cards, when you make a repayment. The credit card company will deduct funds from the lowest APR balance transfer monies on your account, then from any outstanding purchase balance (which has a higher purchase APR) and then finally any cash advance balances (cash advance APR is the highest interest levied on credit cards).

Let us look at an example to clarify this point. If you have a credit card balance of £1,000, which consists of a £500 balance transfer at 0%, £250 of purchases at 10% and a £250 cash advance charged at 20%.

If you did not make any repayments and allowed your credit card balance to remain like this for 12 months, you would end up paying £75 in interest over the year (although in practice this is not actually possible, as you must continue to make minimum repayments).

If you were to make a £500 repayment however, most lenders would take this off your balance transfer. This would then leave you with £500, of which £250 would be charged at 10% and £250 charged at 20%. This would lead to annual interest accrual of £75! In other words, paying off half of your credit card balance would have had no impact on the interest you owed to the credit card company!

There are some products out there, such as the Nationwide Building Society's credit cards, where credit card interest is deducted from the highest interest down to the lowest. For more information on this, and a further example to reinforce this point, take a look at our order of credit card repayments information, within the credit cards interest section of the site.