Card rewards aren't freebies

Paul Clitheroe
Paul Clitheroe

WE all like the idea of getting something for nothing but when it comes to credit card rewards, chances are any 'freebies' you earn will come at a surprisingly high price.

Almost half of all credit cards offer points-based rewards, and while they have the potential to deliver worthwhile benefits, these cards should be approached with caution. They are best suited to big spenders who pay the card off in full each month. 

That's because reward schemes are expensive to run, so it's no surprise that you'll generally pay a lot more for a reward-based card than for a standard credit card.

As a guide, comparison site RateCity found the average purchase rate for credit cards with a rewards program is 19.41%. That's almost 3% more than the average rate on non-reward cards.

The annual fees tend to be higher too. The average for a rewards card is $134 annually compared to $55 for a standard card. This fee alone can easily outweigh the cash value of any of any merchandise or flights received as rewards.

The picture is even grimmer if you carry an outstanding card balance. By way of example, RateCity compared 10 popular reward-based cards to see which offered the best value to earn a $100 spending voucher. The GE Money Myer Visa came up trumps, but you'd need to spend $10,000 on the card just to earn the $100 voucher. With an interest rate of 20.69% anyone using this card would only need to have an ongoing balance of about $485 for the reward to be wiped out by interest charges - and that doesn't take into account the $69 annual card fee.

If you must have a card offering rewards, it's important to choose a scheme that matches where you shop as well as your personal spending budget.  If you're unsure whether your card spending is sufficient to justify the card fee, check past statements for an idea of what you regularly rack up on the plastic.

Be sure to invest some time reading the product disclosure statement to work out how many points you can earn for each dollar spent on the card. This varies widely between cards and it can be confusing, though it is an essential step in maximising any value from reward schemes.

Finally, always aim to pay off the card in full each month. If you can't, chances are you'll pay more in interest than the value of any rewards.

As a word of caution, RateCity estimates less than 5% of card holders benefit from a reward program. They really work best for people who spend a lot on their cards - often around $60,000 annually, and who don't have a lingering balance that will attract interest. If that doesn't sound like you, bypass rewards and go for a low rate card.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit for more information.

Topics:  credit cards

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