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Credit Card Rewards: Making them work for you

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Reward credit cards offer a range of benefits to people in all walks of life by offering a variety of incentives to use their cards. The credit card issuers seem to have thought of everyone at brought out rewards cards to meet different lifestyle and spending needs.

The best kind of reward credit card for you will depend on how you use your card. You are bound to find a card to suit your needs as there as so many to choose from. So, if you plan to use your card to make a lot of purchases, then the cashback option might be the one for you. A card with travel perks such as airline points or travel discounts might be best for you if you travel frequently. Put simply, choose a reward card that reflects you lifestyle and your shopping habits when you seek out the best credit cards.

Unless there is something very specific you want from a reward credit card, a cashback card is probably the best choice. These cards provide a credit on your next bill based on your purchases, typically around 1%. So if you spend $1,000 on your card, you get $10 back. This may be good if you are a heavy credit card user.

When choosing a reward credit card it is a good idea to look at the card as a whole, and not just the reward aspect. The credit card should represent all-round good value for money, with a low interest rate and no hidden fees and charges. For example, 1% cashback is of little value if you are being hit with very high interest rate charges each month.

Like most products in the world of personal finance reward credit cards come with their own terms and conditions, so be sure to read the small print. See if the rewards value is capped each month; do rewards expire or need to be claimed within a fixed time period; and see if there are exclusions or other terms that might prevent rewards being earnt or claimed. If possible you should choose a card with flexible rewards with points or credits that are not capped and don’t expire.

Also, be sure to use your common sense when spending with a reward credit card. It can be tempting to make unnecessary purchases to get those few extra air miles or a little more cashback, but the rewards should not dictate your spending decisions. Try to follow the golden rules that apply to any credit card – pay off your balance each month; don’t exceed your credit limit; and spend wisely.

Used properly and chosen wisely, reward credit cards can offer great benefits so be sure to shop around to find the right one for you.

Article by Richard from click4credit.com.au which compares reward cards including the ANZ Balance Visa. Visit the site for more useful information or to apply online.

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Choosing the right credit card to match your needs

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There are a number of different types of credit cards available on today’s market, each bearing its own advantages and disadvantages. Generally speaking, all credit cards can be placed into one of 5 categories based on the features offered. These 5 categories are:

  • Low interest on purchases – allowing consumers to pay a low rate when using a credit card to make purchases
  • 0% Balance Transfer period – allowing consumers to transfer a balance from an existing credit card and pay no interest on the balance for the duration of the interest free period
  • Low annual fee credit cards – a card that does  not cost the earth to own
  • Reward credit cards – offering consumers a range of attractive rewards built up each time the card is used to make purchases
  • Secured Credit Cards – used by those that have a bad credit rating due to events in the past, such as unpaid bills; frequent charges due to going overdrawn etc.

There are a number of other factors that can be explored, but these tend to spawn from one of the categories mentioned above, so I will stick to these for now and go through some of the potential advantages and disadvantages of each.

Low Interest Credit Cards

These cards are generally used by people that don't always clear their balance off in full, so look to pay the least amount of interest as possible. If used properly, these cards can be an effective financial tool giving you the flexibility to spend as required.

As with all credit cards, it is recommended that you always pay off the full outstanding balance at the end of each month. This will allow you to avoid paying any unnecessary interest, but be wary of low rate cards, as some come with no interest free days, so any purchases will be instantly subject to the specified interest rate. If you find you can’t afford to pay the full amount, always make sure you pay at least the minimum balance to avoid any charges and prevent your credit rating to diminish.

If you tend to pay your full balance off at the end of every month, you are better off looking for another feature such as rewards, as most cards offer 55 interest free days as standard, which means that as long as you pay the full amount off within this period, you will never have to pay any interest charges, thus cancelling out any advantages to a lower rate.

Some low interest credit cards offer an introductory low interest period, which means that your purchases will be subject to the low rate for the duration of this period. If this sounds like a good option for you, make sure you find out what the rate will rise to after the offer expires, as you could find yourself paying rates that fall over the odds.

Balance Transfer Credit Cards

Balance transfer credit cards are used by people that want to transfer existing debt. There are some great deals when it comes to this feature, with some cards offering 0% introductory periods, giving the user a tool for freezing interest for the specified period of time.

This type of credit card can provide an effective method for clearing debt. For example, if you owe $5,000 from your current credit card and you’re paying 12% interest per annum, your $5,000 will increase by $600 after just one year. The beauty of transferring your balance across to a 0% card is that you can avoid this interest and pay off you debt before the interest free period expires.

The best way to clear your debt is by dividing what you owe by the number of interest free months available on your new card, then pay this amount each month. For example, you find a card offering 12 months 0% on balance transfers. Divide your $5,000 by 12 to get just over $416, then pay this amount each month and be debt clear in a year.

You need to remember to pay off your balance every month, even if it's just the minimum required amount, so don't think of it as a place to hide your debt and forget about it! Late payment can result in loss of the interest free period, so make sure you’re serious about clearing your debt.

An important thing to remember when using a balance transfer credit card is to only ever use it to transfer a balance and never for both transfers and purchases. The reason for this is that any balanced tranfered from a previous card will take priority on any payments made against your full purchases and transferred balance. For example, if you transferred $1,000 and later used your card to pay for $100 of goods, any payments that you make against the balance will be subtracted from the initial $1,000, and the $100 purchase will still remain unpaid and begin to accumulate interest charges after the 0% period expires.

Low annual fee credit cards

Most Australian credit cards charge an annual fee to own and although these fees tend to be fairly low, you can avoid paying them all together. This may sound great, but if used by the wrong type of credit card user they can be a very expensive source of credit. This is because cards tend to be aimed at a certain group of people, so by providing one attractive feature, they may have to sacrifice another. For example, the card may just cost you $20 per year to own, but the rate you are paying on using the card is likely to be significantly higher than other credit cards, and you may also find your interest free days do not apply.

HSBC are currently offering consumers a 1 year no annual fee credit card, that increases to $49 per annum after the first year. With this card you still get your 55 interest free days so can avoid paying any interest if balances are paid off in full.

Rewards Credit Cards

If you like to use your credit card to cover most of your spending, and you always pay off your balance at the end of every billing period without fail, you may be the perfect candidate to take advantage of a rewards credit card.

You can choose from a range of credit cards to find a reward scheme that best suits you, with some rewards including airmiles, merchandise, vouchers, and much more.

You can earn reward points every time you use your card. You can easily boost your point by using your card to make as many purchases as possible, such as grocery shopping, fuel, and bills.

Most reward cards come with high annual fees, so in order to justify having one, you will need to use it regularly. If you are unable to pay your balance off in full each month, you are likely to end up paying more in interest than you earn in rewards.

Secured Credit Cards

If you’ve ever experienced difficulty with credit in the past, or you’ve had problems repaying your financial obligations, you could have a damaged credit rating, making it difficult to be approved for a credit card.  This is where secured credit cards step in, as they are designed for people that have a bad credit score, and can be used to help rebuild your rating. The catch with these cards is that you are likely to be exposed to much higher rates than you would find on a regular credit card, so if you are planning to use this card, be vigilant.
If you use a secured credit card wisely, you can benefit from a useful spending tool, while improving your credit score, as you are demonstrating that you can be trusted with credit.

To earn initial trust from your credit card provider you must put first down a cash deposit in order to get the card. This defines the "secured" element of the deal. Deposits can range anywhere between $100 and $250, on top of the annual fee.

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Don't pay out on unnecessary credit card fees

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It is possible to avoid paying fees all together, as many users have shown.

Most people will agree that these fees are too high, and equally that penalties are unfair. It is commonly known that banks and other credit card providers make significant amounts of money from these fees. Take last year for example, the Reserve Bank of Australia (RBA) saw a 12% increase in credit card fees compared with figures from the previous year, and by a staggering 170% when compared to 5 years ago.

The RBA also found that fees that came from common breaches of contracts such as exceeding credit limits, paying for transactions made abroad and failing to pay bills on time rose the fastest in 2007 by 16%.

You can easily avoid these fees, so don't pay out when you don't need to. It is important to fully understand the wide variety of possible fees, giving you the best chance of steering clear. If you feel there are better deals on the market to your current credit card, it is less trouble to switch than you may think. You can even transfer your current balance across to the new card and no interest on it for a limited introductory period. For this reason, it definitely pays to compare credit cards to find the one that best suits your spending needs.

Below are a list of steps that you can follow to help you to minimise, or even avoid credit card fees:

It is important to always ensure you pay your credit card bill (at least the minimum payment) on or before the due date, taking into account that an online payment could take a few days to process. Fees generally range between $25 and $30, but these can be easily avoided by setting up a direct debit from your bank account to ensure the bill is always paid off on-time.

When choosing a card, reduce the additional cards to the number you require. These are  supplementary cards that can be given to a family member of friend, but can add extra card fees on top of your bill, especially with reward credit cards.

By comparing credit cards you are able to decide how much annual fee you wish to pay. Cards that offer no annual fee tend to have higher interest rates, sometimes with no interest free days, which means that your balance would be subject to interest as soon as a purchase is made. Alternatively you may have to spend over a certain amount to avoid the annual fee.

Cards that come with rewards programs often have higher annual fees than regular cards, so you need to find a balance between how useful the rewards are and how high the fee is.

A general rule of thumb is to stick to just one or two credit cards, as it makes everything far more manageable, such as monitoring bill dates and monitoring transactions. This will also help you to keep annual fees down.

Try to avoid using your credit card to withdraw cash. Cash advances generally begin accumulating interest on the day they are made, even with interest free days (these are for purchases only) and most banks will also charge a fee for each cash advance.

One of the key ways of avoiding credit card fees is simply by staying within your limit, as these are high charges that may be completely unnecessary. By keeping up to date on your balances and knowing exactly how much money you can use, you can always ensure you don’t go over your limit. This can be done using internet banking so you can regularly check your account, or  you may prefer to use other banking facilities such as ATMs, telephone banking.

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Credit Card Rewards: Do they stack up?

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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. But they all have the same basic premise: the more purchases you charge to the reward credit cards 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. 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.

Credit Cards with General / Catalogue Rewards. The credit card usually has partners in the program who provide the products offered for redemption under the rewards program. The items on offer could be anything although may include small applicances luggae, movie tickets, gift vouchers and more.

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 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. This could take the form of an immediate discount, a buy-1-take-1 offer, or buy X items and get the Next free, etc.

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 don’t pay your cad bills in full each month then it’s more than likely you won’t be suited to a points based rewards credit card. 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 ensuing interest expense would simply outweigh any benefits you expect from the rewards program.

Often rewards cards have an annual 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.

The simplest way to measure this is to work out how much you would have to spend per $1 of rewards. 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. Point currency gives you the spending value of your rewards points. You simply divide the required number of points to redeem a reward item by its suggested retail price. The lower the number of points required the higher the points value are as you need less points for the same 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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