Why cards are back-tracking on rates

Demand for credit cards offering cashback is soaring - yet many providers have been quietly reducing the amounts they pay out.

New research this week revealed the yawning gap between the best and worst-paying cashback cards. It found that people holding the most generous plastic can earn 12 times more than those with the stingiest.

Cashback schemes give you money back based on how much you spend. Some, such as the Alliance & Leicester MoneyBack card, give you a cheque each year, while others, such as the American Express Blue card, credit it to your account annually. Around half of all Britain's credit card holders dutifully pay off their bills in full each month, and for them a decent rewards programme, such as cashback, is effectively "free money".

Historically, these cards have tended to give back about 1% of the amount spent on purchases - ie £1 for every £100. But in recent months, several providers have hacked away at rates.

One of the most recent cashback cutters is the Halifax. Last month, Jobs & Money highlighted how many people with its credit cards - including those who transferred from Bank One - have seen their cashback rate slashed for the second time in a year. Last year it halved the rate from 1% to 0.5%, and now it has halved it again to 0.25%. The changes, it says, "reflect the market we are in".

It's certainly fair to say that Halifax isn't alone. Last month Capital One also halved the amount of cashback on its Circle Rebate card, from 1% to 0.5%. And in April, the Egg Card - which once offered 1% - reduced its cashback rate from 0.5% to a measly 0.1% (though it does have some special deals where you can earn between 3% and 10% cashback when you use its selection of online retailers).

The American Express Blue card has the most generous deal - 2% during the first three months and 1% after that, with no limit on the amount of money back you can earn. "The highest level of money back this year was in excess of £500," says an American Express spokeswoman. For bigger spenders, its Platinum card could prove a winner with tiered rates - 0.5% cashback on the first £2,000 of spending each year, then 1% between £2,000 and £5,000, and 2% on everything above £5,000.

Moneysupermarket.com looked at how much money someone would earn after one year if they spent £500 a month using some of the leading cashback cards.

American Express Blue came out top with a not-to-be-sniffed-at £75 - pretty good going if you pay off your balance in full and avoid paying interest. The American Express Platinum card was in second place with £60. Nationwide's Cash Reward Card managed a creditable £45 - it pays 1% for the first six months and 0.5% after that.

Propping up the bottom of the table were the Halifax One card, which would earn you £15, and the Egg card, which would give you just £6 back for spending £6,000.

However, you can't look at the cashback in isolation. Amex's plastic may be the most generous in terms of what it pays out but there are retailers - most notably, Boots - that don't accept it. The Blue card has no annual fee, but if you spend less than £500 in the 12 months preceding your card anniversary date, Amex will hit you with a £15 for "account servicing".

And while the Egg Card is never going to make you rich, it does boast several other perks. People who sign up for the card this month will enjoy a 0% rate on both balance transfers and new purchases until February 1, 2005.

It's also important to remember that interest rates are often higher than standard credit cards. If you don't always pay off your balance, the interest could wipe out any cashback.

Needless to say, avoid cards with annual fees.