When shopping around for a credit card, people will often cite the rewards opportunities as a reason they settled on a certain credit card.
There’s nothing wrong with that; used wisely, credit card rewards can be used to buy groceries or much-needed appliances and allow you to set aside a bit of money for your savings. But when it comes to credit card companies, it’s always worthwhile to remember that they are businesses, not charities.
Inevitably, rewards are part of their business plan and designed to keep you as a consumer and make money.
Here’s how to make credit card reward programmes work for you.
Does your rewards credit card actually reward you?
The Reserve Bank recently reported that the average consumer needs to spend $18,000 before earning $100 in rewards. Ten years ago, a consumer only had to spend half of that amount to qualify for the same level of rewards. There are also hidden aspects of rewards programs; namely, the annual fee, ‘interest-free’ periods, rewards capping and other attendant costs.
So are rewards really worthwhile? Much of that depends on your own patterns as a credit card user, and being aware of how you use credit cards is the best way to take advantage of the reward system.
We often hear from Savings Guide readers on very low incomes, trying to use credit cards to accumulate points. Quite often the spending that is put through these credit cards just simply don’t add up to give them any real benefit.
Many of these people would simply be better looking for a low interest rate credit card to stop paying interest (interest only further negate any benefit of rewards points).
The annual fee on your rewards card may negate the reward points
The general rule is, the higher than annual fee, the ‘better’ the rewards are. That’s at first glance however.
The example from CHOICE cites examples from Westpac. On the platinum card, you earn 3 points per dollar, as opposed to the 2 points per dollar on the standard card. It’s a no-brainer right? Except that the annual fee for the platinum is $295 per year compared to $100 for the standard fee.
Unless you’re a high credit card spender, you’re likely to end the year out of pocket with the platinum card. It’s impossible to earn enough reward points unless you’re a high spender, and a far wiser financial decision to go with a lower annual fee.
If you’re a high spender, then a card with a high annual fee will maximise your rewards but with moderate spending, it’s far better to look for lower fee cards with reasonable reward returns.
If you’re paying interest on your rewards credit card, your points are next to worthless (as you’ve paid for them)
Obviously, the best way to earn reward points would be to put a reasonable amount of your purchases on a credit card and pay if off within the interest-free period. It should be simple, but as we’ve said, credit card companies are about business, not providing a service.
Interest free periods are calculated differently by providers. What many people don’t realise, is the 44 or 55 day interest free periods do not start the moment you purchase; it all depends on how far away your statement cycle is.
For instance, if you’ve purchased on the 1st of the month, you will have 44 days but if you’ve purchased on the 28th of the month, you’ll only have 16 days before interest starts accruing.
It’s essential to know how interest is calculated on your credit card and to adjust your spending and repayment accordingly.
Capped points can hinder realising the true potential of your rewards credit card
So, you’ve got a solid income and you pay off your credit card easily at the end of the month. You’ve put all your spending on the card and expect to have a huge amount of rewards, only to check your balance and find the amount is minuscule.
This is because some rewards credit cards cap the amount of points you can earn each month, or tier the earn rate to earn more on the first $5,000 of spend followed by a lower earn rate on the subsequent spending above this.
Points On Points
CHOICE suggests that research has shown flight rewards to be the best value, although vouchers (which allow you to take advantage of sale items) are probably also a good savings tool.
The key is understanding how you use your credit card; if you can’t pay your card off at the end of every month, it’s a far better idea to use a low-interest card until you’re back in the black.
Likewise, if your use is relatively low, better to use a card with a low annual fee and save money that way (while ideally avoiding annual fees altogether).