Credit cards with rewards are basically a loyalty program for the bank or associated partners such as an airline. You” earn the most rewards if you use your rewards card as your everyday credit card for as many transactions as possible.
Reward credit cards are packaged in several types, each one offering rewards programs calibrated to suit particular spending patterns. While they vary they all use the basic appoach of the more you spend on your card the greater the rewards.
Understanding the different reward card varieties
Frequent flyer credit cards. Points earned from a frequent flyer credit card normally go to the frequent flyer program of the airline you prefer. The number of points earned depends on how much spending is charged to the card. Frequent flyer cards and points not only offer flights but can be used with travel partners such as major hotel chains, car rental and more.
General reward credit cards. The credit card usually has partners in the program who provide the products offered for redemption under the rewards program. These items could be anything (the possibilities are endless) from gift cards, home appliances, holidays, shopping vouchers, magazine subscriptions, etc.
Cash-back reward credit cards. These cards offer a very simple program: your account is credited for a certain percentage of the amount spent on particular items. For example, you may get a 5 per cent rebate for fuel purchases.
Instant reward credit cards. These programs are more straight forward. There are no points to accumulate; you will simply receive an instant reward from participating merchants. The offer could be a discount, rebate or a bonus with items such as mobile phones.
Getting value from reward credit cards
Your credit card should fit your spending behaviour. If you use charge often and prefer not to carry any balances, reward credit cards that allow you to accumulate points should work best for you.
If you cannot pay off the entire amount due each month, point-based reward credit cards will be irrelevant. Rewards programs are partly funded through higher interest rates on purchases; if you pay your bills in full by the due date then you may avoid all interest charges, otherwise it could be very costly. Unpaid balances carried into the next payment period will attract the high interest rate. The cost of the high interest charges is likely to far exceed the value of any rewards earnt.
Reward credit cards usually impose a membership fee. Try to work out how much you will earn in rewards each year based on your typically spending patterns and then work out your costs such as fees and interest.
One quick way to measure that is to estimate how much you have to spend to get $1 of reward. Not all cards award equally, some might earn you one point per dollar spent while another could offer 1.5 points per $1. To get a reward item worth 6,000 points you thus need to spend $6,000 on the first card and only $4,000 on the other.
Another method is the point currency concept developed by Cannex. Point currency gives you the spending value of your rewards points. All you need to do is divide the number of points for the reward item of your choice by the recommended retail price. The lower points needed the higher its value because you consume fewer points to get the reward.
For example, one program may require 10,000 points to win an item worth $75 in retail, but another program may need 12,000 points. The point currency in the first program is 10,000 divided by $75 or 133.3 points per $1 for the first, and 12,000 points divided by $75 or 160 points per $1 for the other.
As far as the rewards item is concerned, the first program gives you better point currency. Note though that if you incorporate the first method and the example described above, you may need to spend $10,000 to accumulate the required points in one program (at 1 point earned per $1 spent) but only $8,000 in the other (at 1.5 points earned per $1 spent).
The point should be clear: you need to regularly evaluate your reward credit cards for the worth of their benefits to you.
This article written by R.Greenwood from credit card comparison website click4credit.com.au.
