ARTICLES > Credit Card Reward Schemes, Are They Worth It?
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Credit Card Reward Schemes, Are They Worth It?
Credit card companies use rewards to encourage people to sign up to use their credit cards. The thing to remember is this, the companies do not offer rewards and then expect to lose money! Credit card companies are in the business of making money and this is one way of increasing profits. ► Why do people sign up for reward schemes? The answer to this one is simple, there are some great rewards offered. You can earn air points, free trips, discounts on purchases and cash back offers. It feels like we are getting something for nothing – but are we? ► How does a credit card rewards scheme work? Most credit cards have an annual fee attached to them. Often there will be an additional fee to cover the administration of the rewards programme. The amount of this fee will vary from one card to the next. ► The truth about fees paid and rewards earned. If you don’t spend enough each month, or if you regularly pay interest on your card, then the fees plus interest are probably more than the value of the rewards gained. A survey of credit cards and their rewards schemes showed that over half of all cards returned less in rewards than the cost of the card. The amount you need to spend will differ from card to card but ranges from $12,000 - $20,000 – remember, that’s what you need to spend on your card each year to earn enough points just to cover the fee charged. This immediately means, for many people, it is not worth it. ► How do I work out if it’s worth it? The first thing we need to do is to ask a few questions; Do I ever buy things using my credit card that I wouldn’t usually buy just to get rewards points? Do I ever go to a store and purchase something that I know I could get cheaper elsewhere just to get rewards points? Do I ever put too much on my card so that I’m unable to pay it off within the month? If you answered ‘yes’ to any of these questions then you are wasting money because the points you earn will not be worth what you have to spend to accumulate them. ► The truth about points value. Very few consumers have calculated what the points they are earning are really worth. And many people might be shocked to find out. Points vary greatly from card to card. For instance, as regards flight rewards points The bottom-line Reward credit cards are used to encourage people to put money on their credit cards in order to earn the rewards. When people spend with credit they tend to overspend. Reward credit cards are one of the best ways that credit card companies have to encourage people to keep spending money on their credit cards. If you currently have a large amount of credit card debt, you should stop putting things on your card until you have paid it off completely. Once you have done this you may consider using it for the rewards, as long as you pay off the balance in full each month. ► How do I make a credit card rewards scheme work for me? 1] Choose the right card. Different cards have different fees and different means of accumulating and redeeming reward points. Depending on how much you spend on your card and how you like to spend your points will depend on what card is best for you. It pays to research before committing to a card. 2] Check if points expire. A few cards have no expiry date on their rewards points. Others expire after a certain time, sometimes as short as a year or two. Research has shown that up to a third of all rewards points go unclaimed, either because people forget to use them or because they expire before they are redeemed. 3] Vouchers are the best reward (apart from cash). When you use your reward points to purchase goods you are usually paying top dollar for those goods. It is very likely you could get them cheaper by shopping around. So, when you redeem points if something like grocery vouchers are an option, get those and use the money you would have spent on groceries to buy the item from the cheaper retailer. 4] Never buy anything just to get points. The value of individual points are just too small to go especially searching for them. Here is a calculation that some people may be surprised by;
So, in this example, if you get one point for every $20 spent on your card, and it takes 14 points to equal $1 spending money; Then, you need to spend $280 on your card to get $1 to spend. And so, to get the 700 points you need to earn that $50 toaster, you need to spend $2,800. This is fine if you are going to spend that $2,800 anyway. However, if you have purchased an item, or from a particular store, just to gain points, you might find it was cheaper just to go out and buy the toaster for $50. 5] Double Dip on your cards. Many shoppers double dip on their cards by using their credit cards at stores that use Fly Buys or the like – that way you get points on your Fly Buys and points on your credit card. Beware, however. Only do this if you are going to buy from those stores anyway. To purchase anything from a store just to get points is wasting money.  The Rules you must never break:1] Pay off the card in full every month. Reward schemes only work for people who pay off their credit cards every single month. If you miss one payment and pay interest you will have nullified any benefit you may gain from reward points. 2] Increase your everyday spending on the card. The more you spend the more reward points you get. But remember – if you don’t pay it off every single month, you are losing out. 3] Know the finer details relating to your card. Every card has different rules and different ways of calculating fees and rewards points etc. Some have expiry dates for their rewards, others have a maximum number of points you can earn each year. Knowing all the finer details means no disappointments later on when you come to redeem points. 4] Think about how you redeem your rewards. Do the maths. Sometimes it is cheaper to get vouchers and buy any specific item you’d like on sale. So, if you don’t pay off your card in full each month, the rewards are not worth having a credit card. For example on a cash back card you can earn between one to five percent back on each purchase made. If you have a normal credit card with an interest rate of ten percent and even carry the balance over for two months you more than pay for that five percent back. It would save you money to pay cash and not be charged the interest. What if I spend a lot and pay off my card every month? If you spend over $20,000 a year on your card and don’t pay interest, you may find that you are getting more than you are losing. But there are other factors you need to take into account. Another thing to consider is the annual fee that you are charged for having a credit card. There are so many competing credit card companies, that you should consider switching to a card without a fee. There is no need to pay a fee on a credit card at anytime. Click here to read our article Reward Schemes - Are They Worth It?
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