Credit Card Rewards
When shopping around for a credit card, people will often cite the rewards opportunities as a reason they settled on a certain 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 them work for you.
Are They Really Rewarding?
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.
The Annual Fee
The general rule is, the higher than the 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.
Interest-Free
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. Some allow 44 days irregardless. Others allow 44 days from the start of any given month. Meaning that 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 card and to adjust your spending and repayment accordingly.
Capped
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. Not all companies will cap rewards points per month, but some do and it’s essential to check before you commit to a rewards program.
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 credit; 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.
The information contained in this newsletter is of a general nature only and does not take into account your particular objectives, financial situation or needs. Accordingly the information should not be used, relied upon or treated as a substitute for specific financial advice. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided. Taurus Financial Services Pty Ltd its directors or staff, nor its employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.