Are rewards credit cards worth it?
Getting rewarded for spending money sounds like an ideal scenario. But will a rewards card really give you bang for your buck? This short guide will take you through the things to think about before signing up for a new rewards credit card.
What is a rewards credit card?
Rewards credit cards are like loyalty programs attached to credit card. When you use your credit card, you’re rewarded with a certain point value per dollar spent, for example, you can earn 1 point per dollar. You then redeem points for rewards, which can span everything from travel rewards, supermarket rewards, cash rewards, store rewards and gift cards.
Should I get a rewards card?
If you're unsure of whether you should sign up for a rewards card, consider the following questions.
Can you pay off your monthly balance on time?
This is the most important question of all. Rewards credit cards will only be worth it if you are disciplined, and religiously pay off your balance by the due date every month. If not, you’ll be charged high interest in the form of your credit card's purchase rate. Since this purchase rate is typically higher for a rewards card than any other card type - around 20% or more - this could have you paying through the nose.
Along with annual fees and late fees, paying interest will make your rewards card more expensive than it's worth. What’s more, if you don’t pay off your balance on time, the bank will probably block you from earning points as a penalty, making this type of card, well… pointless.
An example of what happens when you don't pay your balance on time
Using the moneysmart.gov.au credit card calculator, here is how much you’d end up paying with an outstanding $2000 balance at a 20% interest rate.
If making the minimum repayments (starting at $41 for the first month then decreasing as you slowly pay the debt off), you’d pay $7, 709 over 24 years and 9 months.
If you opted for higher repayments and paid $100 a month, you’d pay $2403 in total over 2 years.
While this is considerably less than the previous figure, you’re still paying $403 for no reason, whereas if you pay on time, the amount you pay will only be $2000, plus any fees.
Does the type of reward offered match your interests?
Make sure to check out what kind of rewards are on offer to get the best rewards credit card for you. Opt for rewards you would normally use in everyday life, so you can enjoy perks that are practical. Here are common types of rewards offered:
- could come in handy if you jet set a lot. You can use points to purchase flights, upgrades (for example upgrading premium economy to business class), accommodation, and concierge services.* Check out a frequent flyer credit card like the top-rated , or one linked to the popular Velocity frequent flyer program with Virgin Australia.
- Supermarket rewards offer you a discount on your grocery bill when you spend enough, such as the $10 discount you get per 2,000 points with the .
- is an attractive option, as it supplies you with cash rewards once you’ve spent enough on your card.
- Gift cards are available for redemption from selected retail partners.
- Store rewards let you redeem a variety of items, from beauty products to personal electronics. Examples include the Qantas Store and GO Rewards online store.
*Using a frequent flyer card, you'll get the best value for your points by redeeming them for: upgrades starting from Premium Economy, followed by airfares. Store purchases offer the least value. As an example, the iPhone 11 Pro 64GB, which retails for $1749, will cost you 304,180 points in the Qantas store. Compare this to a one-way business class trip to LA, which can cost upwards of $3000, but only 108,400 frequent flyer points – offering much better value.
Are you going to spend enough to qualify for the rewards?
Choose a credit card that matches your spending habits. Rewards cards usually have a higher credit limit than other types like low rate credit cards. Credit card providers will market this as a way for you to maximise points, but be wary of overspending just to earn rewards. It won’t be financially viable, as you’ll end up spending more than you normally would, negating the value of any rewards.
Reward cards will also have a minimum credit limit. This is the minimum amount you need to spend each month to qualify for the card. An , exemplified by the . However minimum credit limits can be significantly higher, for example you need to spend at least $3000 a month on the or the .
To make sure you can meet the minimum spend amont required from a prospective rewards card, draw up a budget of how much you already spend each month.
Consider everyday expenses like groceries, petrol and restaurant bills – these can be paid with your rewards card to bump up your points. If you pay rent, does your real estate agent allow you to pay with a credit card? Sometimes you can even pay mortgage repayments with a credit card, although these will likely incur a fee. You can also usually add additional cards and link them to the same rewards program, so multiple family members can contribute to the minimum spend amount with their regular spending.
However, keep in mind that not all purchases made with a rewards card will earn points. For example, water and electricity bills are usually exempt.
Do credit card fees and rates cost more than the rewards are worth?
While the idea of working towards a free flight or a fatter wallet by earning rewards is appealing, if you end up forking out more in credit card fees each year than the value of rewards you get back, you're probably better off without the card.
Here's a list of the main rates, fees and 'limited time' offers associated with a rewards card:
- Interest-free period: If offered, this is short, usually or .
- A discounted purchase rate the bank offers for a limited period of time. Make sure to check the ongoing purchase rate for the interest charges you'll pay thereafter.
- Purchase rate: The interest rate you’re charged if you have a balance owing at the end of the month. Look for a low ongoing rate that you can afford alongside the minimum repayment amount, if you do miss a payment.
- Annual fee: Not all cards have this, and the fee will generally increase depending on: the minimum income requirement for the card, and the level of premium perks offered, like travel insurance. As an example, the , requires you to earn $15,000 a year, and has a relatively low annual fee of $80. Other annual fees can range up to $700. Some cards also have a for the first year.
- Cash advance fees: These are charged if you transfer funds or withdraw money at an ATM or bank teller, and attract a cash advance interest rate.
- Late payment fee: If you don’t pay your bill on time, this is charged along with the purchase rate.
Other fees include rewards program fees, international transaction fees, and penalty fees if you exceed your credit limit.
What are the points really worth?
- Are there This offers a nice little lump sum of points to get you started, but check the terms and conditions to make sure you don't need to spend an unreasonable amount on the card in a short period of time to qualify.
- What’s the points currency? How many points do you get for every $1 that you spend? Some cards may have a lower point value, like 0.75 points per $1, but offset this in the form of lower, or zero, annual fees or other perks.
- What is the points value? Do some research to find out. For example, if you’re interested in Qantas Frequent Flyer points, consult the Qantas Classic Flight Rewards Tables online to see how many points you need for your planned trip. You might find out it will take you years to save up the number of points you need, potentially leading to points fatigue. You can then make an informed decision to choose a card with a different reward.
- Is there a points cap? This can stop you from earning any more points after you hit a certain limit (a ‘hard cap’). For example, points earned on the are capped at 100, 000 a year. Sometimes points are ‘soft capped,’ meaning your points rate is reduced after you spend a certain amount.
- Do points expire? If you’re saving up for a major points redemption like a flight, make sure to triple check the expiry date – it would be tear-worthy to have points expire before you’re all set to book.
- How easy is it to redeem points? Make sure that your points balance is easily accessible for checking so you don’t stockpile points without realising. Check whether the redemption process happens online, over the phone, or automatically – for example, when you get offered a discount on your next grocery shop after spending a certain amount. You can also to find out firsthand how other credit card users found the redemption process.
As a catch-all, always remember to read the Product Disclosure Statement so you’re aware of any fine print that may preclude you from redeeming points.
Overall, if you're interested in getting a rewards card, the primary consideration is to be certain you can pay it off on time every month, to avoid getting hit with a high purchase rate. If you can do this, and you're not overspending in order to reach the minimum credit limit or to earn extra points, a rewards credit card might be something you want to put on the table. Also make sure to pick a card type that offers the kind of rewards you want, so you can more easily book that trip or have that extra cash sitting flush in your pocket, just like you deserve.
About the author
Avleen is a content writer for ProductReview. Her area of expertise covers furniture and bedding, home appliances and beauty products. Outside of work she enjoys scribbling down poetry and music, reading fantasy novels, and discovering delicious vegan restaurants.