Are Rewards Credit Cards worth the effort?

You can find rewards cards to suit just about any lifestyle, though you may find that racking up points to earn rewards comes with planning and hard work

Sometimes referred to as “loyalty cards”, a rewards credit card are designed to rewards cardholders for their purchases. This perk of redeeming rewards for everyday purchases is what has made these cards attractive to so many Australians. In order to reap the benefits of a rewards card, you'll have to spend some money first. How much you can earn and what you can redeem your points for will help determine which rewards credit card is right for you.

Keep in mind that there is no such thing as the ideal rewards credit card though, and the right choice will always depend on your individual financial needs, spending habits and rewards goals. Weighing up the pros and cons of the card is a wise way to determine whether the card is of value to you before you consider applying.

We've made it easy for you by highlighting some of the major pros and cons you can expect when using a rewards credit card below.

Learn more about and compare Reward credit cards

Pros and cons of a rewards credit card

Pros

Some of the benefits you can expect when using a rewards credit card include:

• The rewards. Rewards are, of course, the main drawcard. Whether you're racking up points to save and use later, redeem for merchandise or travel bonuses, or use for a cashback discount off your total, shopping with a rewards credit card offers a variety of rewards options.
• Bonus points. Some credit cards offer bonus points for new customers when you sign up. These usually have the same value as regular points and can help you kickstart your points balance from the get-go.
• Diversity. There are a variety of rewards programs on the market, so you're bound to find one that works with your lifestyle. If you're a globetrotter, a rewards credit card that is linked with a frequent flyer program which can earn flight discounts and travel rewards could be of interest. If you have a family and use your credit card for everyday purchases, a card that allows you to earn points at the supermarket could be a better fit. Compare your options and pick the card that offers the rewards you'll get the most value from.
• Instant savings. If you tend to shop at one store, or always look for a certain brand, you could find a card that rewards you instantly on those purchases. You’ll see your savings right there on your receipt, just for using the card. Some store loyalty cards will even give you cash back in the form of a store gift card once you have reached a certain point allowance.
• Travel insurance. Some rewards cards, such as frequent flyer cards, offer extra benefits such as complimentary travel insurance. If you're a regular jet setter, such extras could help reduce your travel costs.
• Cash back. Some cards offer cardholders cashback that can be used to repay your credit card balance. If your balance is starting to build up, this redemption option could help keep your credit card costs to a minimum.

Credit cards with bonus reward points

Cons

Rewards credit cards come with some risks. Before applying for one, familiarise yourself with the potential pitfalls:

• Spending more than normal. With the incentive of a reward to look forward to, some cardholders are tempted to make purchases for the sake of earning rewards. Remember that you'll need to repay the balance, otherwise accumulated interest could counteract any value you've received from your rewards.
• Monetary value. Although dollars can add up to points, the same is not true in reverse. The actual cash value of earned points is just a fraction of what you paid to get it. This could mean having to spend thousands of dollars just to receive one reward that would normally only cost a few hundred.
• High interest rates. The interest rates on these cards tend to be higher than other cards. Unless you are paying off your balance in full each month, this could mean that the rewards benefit is being lost in high interest payments.
• Fees. Along with the high interest rates, rewards cards often come with high annual fees. This can also offset the value you receive from your rewards.
• Restrictions. Most rewards credit cards restrict the ways in which cardholders can earn and redeem rewards. For example, frequent flyer cards can only be used for discounts with a particular airline and their partners. Make sure that you understand how you can earn points and redeem your rewards to ensure it compliments your spending habits and lifestyle.
• Point capping and expiry. Many cards only allow cardholders to earn a certain amount of points per year. If you use your credit card regularly and have the potential to earn points beyond this cap, such restrictions could limit the value of the card for you. Do you plan to save your points over time to redeem for a larger reward? Make sure you know when your points expire, otherwise you could lose them before you get a chance to redeem them.

What should I be wary of when comparing rewards credit cards?

Some extra factors to consider when comparing rewards credit cards include:

• Exorbitant rates and fees. The lure of rewards can make it easy to overlook rates and fees that are above average, yet these can quickly negate any benefit that earning rewards would bring.
• Your spending habits. Don’t choose a card that will force you to change your spending habits in order to earn points. Check the partners carefully to ensure that they include merchants where you would normally shop.
• Points to dollar ratio. Some cards have a set ratio no matter where you use your rewards credit card, while others tier the points depending on where you spend. This system can help you earn points faster but only if the extra points are earned through merchants you typically shop with.
• Rewards. Don’t get tied into a rewards card program that doesn't offer rewards that are of interest to you. For example, if you don’t travel frequently avoid the frequent flyer rewards cards and look at those where you can redeem points for merchandise.
• Capped points. If you do shop frequently with a credit card you will want to look at the number of points allowed per year. There are some cards which do not cap the points allowed, making every dollar spent with the card worth it.
• Expired points. Another thing to consider is whether the points will expire. Some rewards cards will require you to use earned points within a certain time frame or else they will be removed from your balance.

Used correctly, a rewards credit card can be a valuable way to earn rewards for your everyday purchases and loyalty. However, as there are a number of rewards credit cards options on the market, it's always best to compare your options before selecting your card.

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