Credit card rewards: are they right for you?

In the age of online shopping and what seems to be becoming a cashless society, it would be hard to get by without a credit card. But what about credit cards that offer a rewards program? Are they as valuable as your lender would like you to believe?

Like other loyalty programs, rewards credit cards allow you to earn points towards flights, accommodation, specific merchandise, fuel or vouchers while you use your card. The more purchases you put through your credit card, the more rewards points you can earn.

The catch, however, is that you generally have to spend a lot on your credit card before you can claim any rewards. This is fine if you use your card almost like a cash card and pay off the full balance each month, otherwise you may end up getting trapped in a growing whirlwind of debt.

Assessing the benefits

The value of points varies dramatically from one rewards credit card to the next. There are two key factors when choosing a rewards credit card: the amount of points you earn per dollar spent, and the annual fee on the credit card.

Often, credit cards that accrue a higher number of points per dollar spent come with a higher annual fee. While some credit cards have zero or low annual fees – including rewards credit cards that require a lot of spending to accrue a valuable amount of points – rewards credit cards at the premium end of the spectrum can charge fees as high as $450.

In the end, choosing the right card option comes down to how much you are likely to spend each month.

“Choosing the best credit card reward program comes down to your spending habits. You may not want to pay higher interest rates and fees for a platinum rewards credit card if you barely use your card, as the rates may outweigh the reward benefits,” Alex Parsons, CEO of RateCity.com.au, said.

“Likewise, if you are a big spender you may find you’ll benefit greatly from owning a premium rewards credit card, despite an increased interest rate.”

Added costs

A higher annual fee is not the only extra cost to consider when assessing your options. Rewards credit cards generally carry a higher interest than regular credit cards so unless you pay off the balance each month, you will find yourself incurring high interest charges. This additional cost could easily outweigh the benefit of any rewards, so think hard about how you plan to use your card before you choose the best option for your needs.

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