High annual fees and interest rates can quickly outweigh the benefits of having a rewards credit card. Here’s what you need to know to make sure you get the best value from these programs.
With the promise of points for flights, gift cards, merchandise and cash back, rewards credit cards are a popular way to get more value out of paying with plastic. However, high annual fees and interest rates mean that the cost of the card could outweigh these potential benefits.
In some cases, people actually end up spending hundreds of dollars more just having a rewards credit card than they ever get back from the points they earn using it. Here, we look at the cost of rewards cards, how many points they earn and other pitfalls, to help you get real value out of any credit card you choose.
Rewards card costs vs the benefits
In 2012, the RBA released a report that showed that the average cost of credit cards frequently outweighed the spending required for cardholders to redeem a $100 gift card. These findings informed the RBA’s approach to regulating credit card costs, particularly in regards to the interchange fees that are charged to merchants for accepting cards.
These fees have been a key source of revenue for credit card companies that offer rewards programs. However, in 2015 the RBA released draft rules that capped these fees for merchants processing Visa, MasterCard and American Express payments. This meant a significant loss in potential earnings for credit card providers.
As a result, there have been major revisions to credit card rewards programs between 2015 and 2016. For example, many cards now offer fewer points per $1 spent, while others offer a lower conversion rate if you want to transfer points to a frequent flyer program. There have also been changes to which transactions do and don’t earn points, and more updates are expected in the future.
The result of these changes is that rewards programs now offer differing rates of value to both existing and new cardholders. This means it’s now more important than ever to make sure the card you use offers you value. Put simply, the rewards should always be worth more than the fees you pay for the card.
How much do you need to spend to get rewards?
A good way to determine the value of a rewards credit card is to look at the amount of money you need to spend to make redemptions. The points required for different rewards varies, so most comparisons use a standard $100 gift card as a guide for spending requirements.
With that in mind, we’ve compared the amount of points needed to redeem a $100 gift card for the major rewards programs linked to different credit cards. We’ve also included the amount you’d be required to spend in order to earn those points based on common earn rates of 0.5 points per $1 and 1 point per $1. Finally, we’ve included the range of annual fees associated with each program.
|Rewards program||Points needed for $100 gift card||Required spend (based on common earn rates)||Annual fee range|
|American Express Membership Rewards||13,500||$0 to $1,200|
|ANZ Rewards Program||22,225||$80 to $375|
|Bankwest More Rewards Program||28,000||$70 to $130|
|Bendigo Bank Rewards||36,667||$24 to $119|
|Citibank Rewards Program||40,000||$99 to $700|
|CommBank Awards||20,000||$59 to $349|
|flybuys Rewards||20,000||$0 to $89|
|Heritage Credit Rewards||64 credits*||$55 to $125|
|HSBC Rewards Plus||20,000||$0 to $149|
|Jetstar Dollars Program||N/A**||Spending for 100 Jetstar Dollars: |
(Note: You must earn a minimum of 200 Jetstar Dollars on the Jetstar Platinum MasterCard to redeem a gift voucher)
|$59 to $149|
|Krisflyer Rewards Program||N/A**||N/A**||Note: There are no credit cards currently offering direct earning for Krisflyer Rewards, but you may be able to exchange points from another program to your Krisflyer account.|
|Macquarie Credit Card Rewards Program||19,250||$199 to $249|
|Q Rewards (BOQ)||28,600||$60 to $99|
|Qantas Frequent Flyer||17,250||$0 to $700|
|Emirates Skywards Rewards||32,000||$299|
|Suncorp Bank Rewards||17,900||$120 to $169|
|Velocity Rewards||18,000||$0 to $349|
|Westpac Altitude Rewards||19,000||$100 to $395|
Rates and fees correct as of August 2016.
*Credits are awarded based on every $1,000 spent per month with a Heritage credit card
**This program does not offer $100 gift cards
Based on this table, we can see that the minimum spend required for a $100 gift card across all rewards programs is $10,000 with Myer One if your credit card offers 1 point per $1 spent. In comparison, the maximum spend required for a $100 gift card would be $80,000 with a Citi Rewards credit card that earns 0.5 points per $1 spent. In the end, if you spend less than $10,000 a year on your credit card, it’s unlikely you’ll get much value from a rewards program.
Spending and rewards vs the annual fee
Once you know how much you need to spend to get a $100 gift card, you can get an idea of whether or not the cost of the card’s annual fee will outweigh the benefits. Use the following steps to work this out for any card.
- Calculate your average spending. Consider what you typically charge to your credit card each month, and then multiply by 12 to get your yearly spending. For example, if you usually spend $2,000 per month on your card, your annual spend would be $24,000.
- Calculate your rewards per year. Use your annual spend to work out how many rewards points you will earn per year. For instance, if you spend an average of $24,000 annually on a card that offers 1 point per $1, you would earn 24,000 points. Once you know the average points you’ll get per year, you can look at the reward redemptions for that program to figure out if you would have enough points for a $100 gift card (or something else).
- Compare your rewards to the annual fee. When you know how many points and rewards you’re likely to get each year, you can see whether or not they offset the cost of the annual fee. For instance, if you’re able to redeem a $100 gift card each year, then a card with an annual fee of $100 or less is worth it. On the other hand, a card with an annual fee of over $100 will cost you more than any reward you will receive. .
The following case studies give examples of when a card is too expensive and when it offers value to the cardholder.
How to know when your rewards card is offering you value
Portia using Bankwest More Platinum MasterCard
Portia has recently seen an ad for the Bankwest More Platinum MasterCard and is interested in applying for it. This card offers 2 points per $1 spent and has an annual fee of $130.
- Annual spending. Portia spends an average of $3,000 per month on her credit card, totalling $36,000 per year.
- Rewards. Based on her current spending habits, Portia would earn 72,000 points per year with this credit card.
- Rewards vs annual fee. It costs 28,000 points to redeem a $100 gift card through the Bankwest More Rewards Program. This means Portia could redeem two $100 gift cards per year (56,000 points) and a $50 gift card for 14,500 points. The total value of these rewards is $250, which outweighs the annual fee of $130 by $120.
This case study shows that higher average credit card spending leads to more rewards, which increases the chances of the benefits outweighing the cost of the annual fee, as is the case for Portia.
How to know when your rewards card isn’t offering you value
Pete using ANZ Platinum Rewards credit card
Pete wants to earn rewards for using his credit card and has heard about the ANZ Platinum Rewards credit card from a friend. This card comes with both a Visa and an American Express option, earning 1 point per $1 on the Visa card and 2 points per $1 on the Amex card. It also has an annual fee of $95. Pete decides to see if it will offer him value based on his current credit card spending habits.
- Average spending. Pete spends an average of $1,000 per month, or $12,000 per year on his card.
- Rewards. If Pete only used the Amex card, he would earn 24,000 points in a year. If he only used the Visa, he would earn 12,000 points. If he used each card 50% of the time, he would earn around 18,000 points.
- Rewards vs annual fee. The ANZ Rewards program offers a $100 gift card for 22,225 points. If Pete used the Amex card everywhere, he would have enough points for this reward, which would cover the $95 annual fee. But if Pete had to use the Visa card for some or all of his spending, he would not earn enough points to cover the annual fee.
In this scenario, Pete would struggle to get substantial value out of the rewards card. Considering Pete doesn’t spend much money with a credit card, he would be better off with a credit card that has no annual fee, with or without rewards.
Tips for maximising the value of your rewards credit card
- Bonus points. Credit card companies regularly offer bonus points for new customers when they spend a certain amount of money in their first few months of having the card. Checking for these offers when you’re comparing rewards cards helps you to get more value out of the program in the first year.
- Reward partner offers. Many credit card rewards programs have reward partners that offer more points when you make purchases with them. For example, the CommBank Awards program offers 1 bonus point per $1 when you use your card with a range of partners including Hoyts, Prouds, Crown Metropol and Thrifty. Other programs, including Velocity and Qantas Frequent Flyer, have seasonal promotions with partners to offer you bonus points. Check with your rewards program to find out what options are available to help boost your points balance and get more value from your card.
- Tiered rewards programs. Some credit cards earn you different point rates based on your purchases. For example, the American Express Qantas Ultimate card offers 3 Qantas Points per $1 spent at participating restaurants and for certain Qantas products and services, 2 Qantas Points per $1 on overseas transactions, and 1 Qantas Point per $1 for most other transactions. It also earns 0.5 Qantas Points per $1 for utility bill and government payments. With these cards, calculate the reward benefits based on where you regularly use your credit card and aim to pay with plastic at the places that offer the highest earn rate.
- Reward redemptions. The points required for different redemptions varies. In some cases you may be able to get more value out of your rewards points by carefully choosing how you redeem them.
- Complimentary extras. Credit card perks such as complimentary insurance, airfares or personal concierge services also add value to rewards cards and can offset the annual fee and other charges.
- Paying your balance in full. If you pay off your credit card balance in full each statement cycle, you will avoid interest charges that add to the cost of the card.
Other costs to consider
- Interest rates. Standard rates for rewards credit cards are often high, so the charges could outweigh the benefits of rewards if you carry a balance.
- Rewards program fees. Some rewards programs require you to pay an annual fee in addition to the credit card annual fee. For example, you will pay a yearly fee if you opt in to earn Qantas Rewards with a Citi or CommBank rewards card. Make sure you factor this cost into your comparisons before choosing a credit card.
- Credit card surcharges. Some merchants charge you a fee for paying with a credit card. Generally it’s less than 1% for a Visa or MasterCard purchase, and up to 2% for American Express. Card payments for taxis and airfares can also often result in additional fees worth 10% or more of the total purchase. These charges could offset the benefit of the points that you earn for the purchases, so always check if there is a surcharge before using your card.
- Card acceptance. While most merchants accept Visa and MasterCard credit cards, it can be harder to find places that accept Amex. Most major retailers do, but it’s worth considering this factor before you choose a particular credit card.
- International transaction fees. Most cards charge a fee of 2% to 3.5% on every transaction you make in a foreign currency. In some cases, this fee could outweigh any rewards you earn for the purchases you make overseas or online with international retailers.
While credit card rewards do provide benefits when you pay with plastic, in some cases the costs outweigh the value of the rewards. Being aware of the different factors that affect rewards card value, and comparing cards before you apply, will help you choose a credit card that offers the most benefits for you.
Comparison of Rewards Credit Cards
Rates last updated December 9th, 2016.
- Virgin Australia Velocity High Flyer Card - 30k Bonus Points offer
Balance transfer offer changed to 1.9% p.a. for 15 months which is valid until 16 January 2017.
November 1st, 2016
- American Express Platinum Edge Credit Card
Standard 10,000 bonus points offer + 0% for 12 months BT offer + $200 Travel Credit
November 1st, 2016
- American Express Explorer Credit Card
100,000 bonus points and balance transfer offers have been extended until 30 January 2017.
November 29th, 2016