Credit Card Rewards: Are they worth it?

Reward credit cards are essentially well-enhanced loyalty programs. The best rewards are earned by the card holders who make their reward credit cards their default option when paying for purchases and other expenditures.

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.

Types of reward credit cards

Frequent flyer credit card. Points earned from a frequent flyer credit card normally go to the frequent flyer program of the airline you prefer. The points you earn is largely determined by the monthly spend made using the card. Aside from free flights, the frequent flyer credit card rewards may include free hotel stays, travel insurance, etc.

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 are among the most simple credit card rewards program and have a clear value such as one percent of what you spend. For example, you may get a 5 per cent rebate for fuel purchases.

Instant reward credit cards. These cards offer even simpler programs. You don’t need to way to clock up points, you simply get access to special rates or discounts from partner retailers and 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. Reward credit cards usually have higher interest rates; the card companies recover the cost of running the rewards program partly from higher interest charges. Any balances not paid by the due date 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. Their value to you therefore depends on whether the worth of benefits you receive exceeds the cost of being in the rewards program.

One quick way to measure that is to estimate how much you have to spend to get $1 of reward. One card may award you 1 point per $1 spend, whilst another gives 1.5 points per $1. In this example to redeem a reward 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. Knowing the point currency lets you work out the spending value of the points you earn. 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).

Your spending pattern and the offers from credit cards can change over time – try to keep tabs on whether you are still benefitting from a credit card scheme.

Article by Richard Greenwood of the Click 4 Group.

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