Credit Cards Spending

Why Cashback Credit Cards May Not Be The Best Option

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You’re finally getting into credit card hacking and you’ve decided to go with cashback because of the implicit simplicity.

After all, one of the most common reasons people opt for cashback credit cards is that they are straightforward to use.

However, this might not be so true.

When it comes to credit cards, there is always some kind of legwork you need to put in in order to maximise your rewards – whether you choose the path of miles or cashback.

Today, I’ll share some reasons why a cashback credit card might not be the best option for you, and what you can consider using instead.

If you’re not already clear on how credit card rewards work, you can check out my guide here!

How Cashback Credit Cards Work

Generally speaking, cashback credit cards are indeed more straightforward compared to miles credit cards.

How it works is that you first use your credit card to pay for your expenses.

Then, each month, you’ll earn a certain % of cashback on your expenses, which will be credited back into your credit card account to offset your future spending.

Note that cashback earned from a credit card cannot be withdrawn as cash.

Most cards credit your earned cashback in the following month rather than in the same month it was earned.

For example, if you spend with your credit card in June, the cashback earned on these transactions might only be credited in July.

This means you’ll only enjoy the cashback when you make further spending in July or later.

One exception to this is the AMEX True Cashback card which awards cashback immediately on the same statement month.

And, depending on the card you use, “month” may refer to a calendar month or statement month, so you’ll need to take note of that.

It’s also important to note that cashback is not awarded on every single transaction.

Universally, across all types of credit cards, there are certain categories of transactions that simply will not earn any type of reward, whether it’s cashback or miles.

This standard exclusion list includes but is not limited to the following:

  • Financial institution payments (ie to banks, brokers, etc.)
  • Card-related fees (ie annual fees, late payment fees, etc.)
  • Education
  • Charitable organisations

Overall, it sounds simple enough, right?

As long as you spend with the card every month, you’ll be earning cashback that is used to offset your spending for the following month, and so on.

Now, let’s take a closer look at the types of cashback credit cards available and why they might not be as simple as you expect.

Types Of Cashback Credit Cards & Why They Might Not Be Ideal

Almost all cashback credit cards fit into 1 of 2 categories – high cashback cards and unlimited cashback cards.

The former tends to award high cashback (5%+) but is bounded by various requirements and conditions.

The latter tends to award low cashback (~1.5%) but is usually free of requirements and conditions.

Both categories face their own challenges when it comes to earning cashback.

High Cashback Credit Cards

The first thing you need to know about high cashback credit cards is that they often award cashback according to 2 rates:

  1. Base cashback
  2. Bonus cashback

The base cashback is the cashback rate that will be applied to transactions that do not fall within the requirements and conditions of the card.

This base rate is extremely low, at ~0.3%.

The bonus cashback rate will only be applied to transactions that are within the requirements and conditions of the specific card you are using.

This bonus rate can range from 5% – 10%, depending on the card you use.

For example, the UOB EVOL credit card is advertised to award 8% cashback, but this will only apply to certain transactions.

Other transactions will only earn 0.3% cashback.

So, when you use a high cashback credit card, you want to make sure that your transactions will earn the bonus cashback rate as much as possible.

Credit cards that award high cashback share similar terms & conditions:

  1. Monthly spending requirement > S$500 to earn bonus cashback
  2. Bonus cashback awarded only on specific categories/payment methods
  3. Cap on bonus cashback that can be earned on each category/payment method
Monthly Spending Requirement

Firstly, they always come with a monthly spending requirement, usually starting from S$500.

This can be an impediment to credit card hacking if your current spending habit does not involve this level of card spending.

Credit card rewards are meant to help you maximise value from the expenses you are already incurring.

If you ever need to force yourself to incur additional expenses just to earn rewards like cashback, then you’re going about it the wrong way.

It’s especially important to note here that the requirement is S$500 card spending, not S$500 of spending in general.

So even if you spend S$600/month, but S$200 of that is in the form of cash or PayNow, then your monthly card spending is only S$400, which does not meet the requirement.

Minimum spending requirements can go as high as S$800, depending on which high cashback card you choose.

Before you decide to use a high cashback credit card, you should be sure that you are able to fulfil this card’s spending criteria easily and consistently.

selected categories/payment methods

Secondly, only transactions made under certain categories or paid with certain payment methods will earn bonus cashback.

This will be specified by each credit card.

For example, UOB EVOL awards 8% cashback on mobile contactless spending and online spending.

This means that it doesn’t matter what categories your transactions fall under – they will earn 8% cashback as long as they are not explicitly excluded categories.

For all other types of spending, it awards only 0.3% cashback.

On the other hand, Citi Cash Back awards 6% cashback on dining and 8% cashback on groceries and petrol.

This means the payment method for these categories isn’t so important – whether it’s contactless payment or chip insertion.

In most cases, online transactions also count, but there might be explicit exclusions, so it’s best to check the terms & conditions of the card itself.

For spending on other categories, it awards only 0.25% cashback.

Depending on which cashback card you choose, you’ll need to remember what the bonus cashback criteria are – the specific categories or payment methods.

And there are some nuances that might not be so obvious as well.

Categories for credit card payments are determined by Merchant Category Code (MCC), which is information that is not typically disclosed to customers.

A merchant might have a different MCC from what you expect it to have, and this can cause you to lose out on cashback if their actual MCC is not within the bonus category list.

For example, a pub that serves food and drinks may not be registered as a restaurant even though they serve main courses.

Using the Citi Cash Back card in this case might not earn you 6% cashback.

For payment methods, it’s important to note the difference between “contactless payment”, “mobile contactless payment”, and “online spending”.

For example, the UOB EVOL card requires mobile contactless payments – that is payments made via a smart device like a smartphone or smartwatch.

Tapping the physical card constitutes a contactless payment only, so it will not qualify for 8% cashback.

In a similar fashion, paying online via Apple Pay or Samsung Pay does not qualify for mobile contactless payment, but rather as online spending.

This is because mobile contactless payment requires the actual tapping of your device to make payment, which online Apple Pay or Samsung Pay does not include.

Cashback cap

Finally, high cashback cards have a cap on the amount of cashback that can be earned every month based on the bonus cashback rate.

These caps may be applied per category/payment method or collectively.

For example, the UOB EVOL card has a cashback cap of S$20 per category – mobile contactless spending, online spending, and all other spending.

Meanwhile, the Citi Cash Back card has a collective cashback cap of S$80 across all its bonus cashback categories.

This cashback cap limits the earning potential of these cards and usually ends up reducing the effective cashback rate of the card.

Let’s use the UOB EVOL card as an example.

It has a monthly spending requirement of S$600 and awards a bonus cashback rate of 8% on mobile contactless and online spending.

To earn S$20 cashback on these categories, spending of S$20/8% = S$250 is required for each category.

However, even if you spend S$250 on both categories, your card spending will only be at S$500, which is still S$100 short of the spending requirement.

This means your next S$100 of card spending will only earn 0.3% cashback.

In other words, the amount of cashback and the effective cashback rate in the best-case scenario is:

Mobile Contactless8%S$250S$20

Now, 6.7% effective cashback is still considerably high, but keep in mind that this is the best-case scenario.

If you’re not able to distribute your spending so precisely, then the effective cashback rate will only decline.

In other words, whatever the advertised cashback rate of a cashback card is, the actual rate of cashback you’re likely going to earn is almost always lower.

Unlimited Cashback Credit Cards

Unlimited cashback cards don’t come with the same challenges as high cashback cards.

There’s no monthly spending requirement, cashback is awarded on almost any transaction, and there is usually no cap on the cashback that can be earned.

However, they face an entirely different problem.

That is, the cashback rate is just dreadfully low.

Earning 1.5% cashback means you earn a whole $1.50 for every $100 spent.

This is barely enough to get a cup of kopi in some food courts.

While it’s certainly better than nothing, some could argue that it’s only marginally better than using debit cards that award 1% cashback.

If you’re considering using an unlimited cashback card, it’s probably not by choice.

For low-spenders who can’t hit the monthly spending requirement of high cashback cards, an unlimited cashback card seems to be your only option.

Rewards Credit Cards – Excellent Alternatives To Cashback Credit Cards

If the points above about cashback cards irk you in some way but you still want to earn cashback for your credit card rewards, you can consider using a rewards card instead.

Many rewards cards are often touted as miles cards because they are able to earn miles at an attractive rate, but they can be used as cashback alternatives as well.

Unlike cashback cards, rewards cards don’t directly earn cash.

Instead, they earn points which can be redeemed for a variety of rewards.

This includes cash vouchers at many different merchants and airline miles.

By redeeming cash vouchers with your rewards points, the rewards card can become a proxy for cashback cards, with a cashback rate of ~2.5%.

How Rewards Credit Cards Work

Rewards credit cards are like a hybrid of high cashback cards and unlimited cashback cards, with characteristics adapted from each.

Like unlimited cashback cards, there is no minimum spending requirement to earn points.

So whether you spend S$100 a month or S$1,000 a month, you’ll be able to earn points at the same rate.

But like high cashback cards, reward points are awarded according to a base rate and bonus rate for selected spending, and there is a monthly cap applied.

However, the monthly cap tends to be a lot more generous – it is often applied collectively, and the caps for the best rewards cards are based on monthly spending of ~S$1,000.

As you spend with your rewards credit card, you will earn points, preferably at a bonus rate.

These points will be credited to your credit card account which you can use to redeem cash vouchers from the rewards catalogue.

The main difference to note between a rewards card and a cashback card is that cashback can be awarded in denominations as small as S$1.

But for rewards cards, you usually need to accumulate a chunk of points first to redeem a cash voucher with some fixed value.

This means that it might take you longer to redeem a cash voucher than to receive cashback.

However, using a rewards card also grants you some flexibility in terms of rewards.

Since rewards points can often be redeemed for cash vouchers and airline miles, it means you have the option to choose whether you want to redeem cashback or miles at a later time.

So if you’re still undecided, using a rewards card might be suitable for you.

The Best Rewards Card To Use – HSBC Revolution

I think the HSBC Revolution card is one of, if not the best rewards card to use because it ticks a lot of boxes.

The HSBC Revolution earns 10 points/S$1 spending on:

  • selected contactless payment transactions
  • selected online transactions

This is collectively capped at a spending of S$1,000/month and points are valid for 3 years.

The rewards exclusion list for the HSBC Revolution is fairly standard, and you can expect to earn 10x points on most online and offline transactions like groceries, dining, ride-hailing, shopping, travel, etc.

However, it doesn’t award 10x points for public transport.

This means you will be earning 10x points on a good majority of your daily expenses, and you don’t have to worry about how much you’ve spent via contactless payment or online payment.

There is also no annual fee for the card, and the card even comes with a complimentary membership to HSBC Entertainer where you are entitled to exclusive 1-for-1 vouchers and discount promotions.

With the points earned from your HSBC Revolution card, you can redeem cash vouchers for Amazon, Lazada, Qoo10, Dairy Farm Group (DFG), and more.

The redemption rates are slightly different for each voucher:

S$20 VoucherPoints
Sephora / ZALORA7,500S$7502.6%
Amazon SG / Qoo108,000S$8002.5%

Clearly, the most value-for-money reward to redeem is the DFG voucher which nets you an effective cashback rate of 2.8%.

This can be used at various merchants under DFG such as Cold Storage and Giant, where you can buy essentials like groceries and household items.

There are even better redemption rates for highly specific merchants like GNC, Popular, and Isetan, but these might be slightly harder to utilise effectively for some people.

Sign Up Rewards: S$30 Cash + Either Samsonite Prestige Luggage / S$150 Cashback

The signup reward is broken down into 2 – S$30 cash from SingSaver and a Samsonite luggage or S$150 cashback from HSBC.

This means that the reward you can receive is either:

  • S$30 cash + Samsonite luggage, or
  • S$30 cash + S$150 cashback

The current offer for signing up for a new HSBC Revolution card runs from 18 Jul – 7 Aug 2023 for SingSaver and 12 Apr – 31 Aug 2023 for HSBC.

To receive the total reward, you need to:

  1. Be a new HSBC credit card customer
  2. Sign up for an HSBC Revolution card via this link
  3. Consent to receive marketing/promotional material from HSBC
  4. Fill in the rewards redemption form within 14 days of card application
  5. Forward the card approval email/SMS from HSBC to within 1 calendar month of the account approval date and no later than 15 September 2023
  6. Make a qualifying spend of S$1,000 by the end of the following month from card approval

I wrote a detailed guide about how to receive these signup rewards in this post, so you can check it out for more details if you’re interested.

When It Is Advisable To Use Cashback Credit Cards

Now, I’m not trying to say that cashback cards are bad and that you shouldn’t use them.

There are definitely times when cashback cards do make sense, and you should use them in such cases.

For example, if you already have a habit of tracking your spending and know that the amount you spend every month is enough to meet the spending requirement of a high cashback card.

Again, remember that you need to know how much card spending you incur every month rather than just your total spending.

So the more detailed you are with your expense tracking, the more likely you are to know whether or not a high cashback card can work for you.

I’d recommend tracking the following details for good measure:

  • amount spent
  • category (ie dining, shopping, etc.)
  • payment method (ie online, contactless)

This will give you all the information you need to make an informed decision about the use of a high cashback credit card.

For tips on how to track your expenses, you can check out my guide here!

Another example of when it might be good to use a cashback card is if you need to make a big ticket expense that is in the range of thousands of dollars.

Since most rewards cards limit the bonus points earned to the first S$1,000 per month, it’s not efficient to use a rewards card for such a large expense.

Instead, this is where using an unlimited cashback card might be more suitable since you’ll be able to earn cashback on the full amount.

Even if the cashback rate is low, since the base expense is already so high, it will still amount to a decent sum of cashback.

The Bottom Line

Again, I’m not trying to say that cashback cards are bad – they can definitely be useful and can be the best option for some people in some cases.

By and large, cashback cards are still much simpler than miles cards because there are so many things to learn when it comes to miles.

But what I want to highlight is that even with cashback cards, there can be some degree of complexity, and it’s important to consider these factors before deciding which type of credit card will work best for you.

And if it seems like a cashback card might not suit your lifestyle too well, you can always consider using a rewards card.

What type of credit card do you use and why? Let me know in the comments below!

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