Cashback to tempt solvent tier of card holders in the face of soaring interest

The launch is further evidence that the credit card market has been broken up into three distinct tiers, according to David Black, head of banking at financial research group Defaqto.

On the first tier lenders are competing for business from people with secure employment and strong credit ratings, who can currently take their pick of the best options.

Black said: "As things stand those people in the first category have little incentive to be loyal, as the most generous offers are aimed at new customers, be it in the form of 0 per cent offers or rewards. That said, a rich reward scheme may engender loyalty."

The lowest tier covers those who are effectively excluded from the credit card market and are targeted by "non-standard" credit providers such as Vanquis Bank and charging typical interest rates between 39.9 and 59.9 per cent.

A growing number of people fall into the middle tier, where credit ratings are subject to close scrutiny from providers examining applications on a case-by-case basis and pricing according to individual risk.

This category has expanded rapidly over the past two years, with lenders seeking to limit exposure to risk as unemployment has risen. The result has been an increase in the average credit card interest rate to 18.8 per cent, the highest in 12 years.

Black said: "Credit card providers are definitely looking for quality and quantity and there's little appetite among the major mainstream providers to expand their unsecured portfolios at the moment."

The new Barclaycard deal fits into the first tier, benefiting those with a strong credit rating who pay their balance off each month.

The deal is aimed at attracting new business, encouraging loyalty among existing customers and increasing the use of cards by those customers.

But experts warned credit card users against being swayed by rewards from retailers and organisations that they would not typically use.

The Barclaycard Freedom provides 0.5 or 1 per cent reward money at around 30,000 retail outlets across the UK. The reward money earned at each retailer is collected on the card and shown on the Chip and Pin machine the next time it is used to make a purchase there, with the option to put it towards the transaction or save it for a future purchase.

Shell, LA Fitness and Pizza Express are among the organisations signed up to the scheme. But the initial list of participants is relatively limited, and with none of the big four supermarkets on board, many cardholders will find they rarely benefit.

Andrew Hagger, head of communications at comparison website Moneynet, commented: "Barclaycard needs to get some more high-profile brands to sign up to the promotion if they are to win business from other card providers.

"There are a few well-known names signed up, as well as many smaller retailers, but they are highly unlikely to get the likes of Tesco or Sainsbury's to join up as they already have their very successful Clubcard and Nectar schemes in place."

Other credit card providers promoting cashback include Egg and American Express. The latter's Platinum Cashback card offers 5 per cent cashback in the first three months, up to 100. Thereafter it pays 0.5 per cent on the first 3,500 a year, 1 per cent between 3,500 and 7,500 and 1.25 per cent on spending above that.

Egg's Money World MasterCard pays 1 per cent cashback up to a maximum of 200 per year. The card costs 1 a month but extras include an extra 12 months' warranty on any electrical goods worth over 50 bought with the card.

Only the Barclaycard deal offers the cashback instantly.

But Hagger cautioned that while cashback and reward cards were a good way of getting something for nothing, only customers paying off their balance in full every month can benefit.

He said: "If you don't clear your card balance every month the interest charges could more than wipe out any benefit you've accrued in rewards or cashback."

The chances of the Barclaycard deal sparking fresh competition in the rewards market are slim, according to Black at Defaqto.

"Ideally credit card providers want a large proportion of their customers to be financially secure but not to repay the entire credit card balance every month, because interest payments are where most of the card provider's profits come from," he said.

"In terms of rewards specifically it's noticeable that the number and generosity of cashback rewards is in decline."