Make sure your reward credit card pays out to you and not the house!"
By Lyndsey Burton
Director, 15 January 2008
If you've already been tempted by the promise of free goodies and points handed out on every pound you spend - not to mention the ones you got for signing up - then you may now find yourself one of the many that start to realise points don't always make prizes.
Reward credit cards are for the most part pretty useful cards to carry, especially if you repay your balance in full each month. But sometimes credit card reward schemes are found to be not much more than an incentivised lure for customer acquisition and company profits.
Why they pay so poorly
Not all reward credit cards pay out poorly, in fact most of them offer pretty good deals; and when used in the right way by the right type of spenders, they can actually see their cardholders in pocket with either savings or money.
However, credit card companies aren't charities - and they are rarely found to be acting particularly charitably. Reward credit cards are just one type of credit card built and designed for the sole purpose of signing up new customers and increasing company revenue.
If they can get more people to sign up, then why pay out any more than they need to?
In truth, credit card companies don't really pay for the rewards anyway - if the cost isn't being covered by the individual cardholder from interest and charges, then each time the cardholder uses the card (to earn their points) the credit card company is charging the retailer behind the scenes for accepting the payment.
These retailer charges are often either covered by slight price increases, or sometimes where retailers want to keep their prices as competitive as possible, these charges will be passed on to anyone who chooses to pay by credit card.
This is something you may well of noticed when buying through travel agents, independents or wholesale companies.
In short, credit card reward schemes can pay out poorly to simply make sure the credit card company is pocketing more from your card use than you are.
The real value of rewards
In reality, earning rewards is more like claiming back some of the money you've already paid out in inflated prices to cover retailer charges, or in actually forking out the credit card payment fee directly!
However, extreme realism aside, whether or not a credit card reward scheme is any good can be deduced by working out the value of it's points.
Reward schemes all offer a type of 'point' to be collected; each of these points has a 'value' - how much it's worth in real money.
While these values may not be marketed or even publicised, it's these hidden values that can determine how good a reward scheme really is.
So how much are your points worth?
To find out if your reward credit card offers you a plentitude or a pittance, you'll need to work out how much each point you earn is worth - but also how much you need to spend in order to earn a point.
Working out the value of a point is a fairly arduous task, you need to look at the types of reward you could claim - how much that reward would cost to buy - and how many points you need to claim it. This equation, which should be done on a few different rewards and averaged out, will give you the monetary value of a point.
Example:
| Reward cost |
£100 |
| Points needed for reward |
20 |
| |
| Cost divided by points |
100 / 20 = 5 |
| |
| Approximate point value |
£5 |
For an easier and quicker calculation! You can also use the spending/reward calculator on our reward credit card comparison page.
How do you know if it's any good?
To name and shame one credit card reward scheme, the MBNA rewards program offers a pretty lousy less-than 0.3 pence point worth. You do get 1 point for each £1 spent, but you'd need to spend £100 just to earn 30 pence worth of rewards.
Compare that to one of the UK's most lucrative reward schemes, the GM Card program offers a £1 point worth. Although you won't earn the points so quickly, you will get a 3% rebate of points on your spending. This equates to earning £3 worth of rewards for every £100 spent.
The difference between 3 pounds and 30 pence is quite considerable; you'd need to spend 10 times more on an MBNA reward scheme to earn the same amount of rewards as offered by the GM Card.
Of course, not everyone will want to earn points towards a new Vauxhall or Saab car.
Cash back schemes offer relative 'point' values of a £1 per point (for comparison purposes). During an introductory bonus period you could be earning up to 5% on your spending - which is £5 for each £100 spent [ref: American Express Platinum].
Outside of introductory bonuses, there are cards offering 1% on supermarket and petrol spend (£2 per £100 spent) [ref: Barclaycard Platinum Cashback], or a flat-rate 1% on all purchases with no limits (£1 per £100) [ref: i24 Card].
But even the lower figure of earning just 1 pound back on every 100 pounds spent, is still way more attractive than the rather ludicrous 30 pence.
When it's time to switch
In truth, the best you're really likely going to get on a reward credit card is not going to be much more - if any more - than £5 per £100 - and thats only as a bonus.
However, if you're getting back much less than 50 pence for each £100 you're spending, you should perhaps be questioning the worthiness of your rewards.
When rewards aren't worthless
Ok, so earning a measly 25 pence back for every £100 you spend may feel like your credit card is cheating you out of a decent payout.
However, there are of course times when pitiful rewards aren't quite as bad as they may seem.
Scenario one is when you're taking out a lengthy 0% purchase credit card to spread the cost of a new kitchen, a shiny 52" plasma TV or perhaps you've put all your savings into an off-shore property investment and it's now time to furnish it out...
If the longest 0% purchase credit card even comes with just 10 pence worth of points for each £100 spent - that's still a nice bonus, and you might even find you've got enough for a free CD by the time your 0% period ends!
Scenario two is the retailer preference. If you hate Tesco with a passion, or you simply live 50 miles away from the nearest store (unlikely), there's absolutely no point in collecting Clubcard points just because Clubcard points work out to be twice as 'worthy' as a Nectar point. If you secretly worship the aisles of Sainsbury's - don't try and change your spending habits to suit your reward credit card, get a Nectar credit card and enjoy the different taste of your groceries.
Make a reward credit card pay you!
Even if you've managed to snap up the best paying reward credit card in the whole of the UK... there are still a few tricks and traps employed by the credit card issuer to try and keep the pennies in their pocket...
Here are the golden rules of making your reward credit card pay you:
1. Always repay your balance in full - get charged any interest on a reward credit card and any money-saving or making benefits will have been blown away in the wind quicker than you can say Mary Poppins.
2. Never use the ATM - don't use a reward credit card (or any credit card if you can help it) to withdraw cash, buy foreign currency, transfer money, gambling, etc... You'll get charged interest from the date of the transaction even if you pay off your balance in full and pay a handling fee - again, wiping out any money saving benefits.
3. Don't shop abroad - leave your reward credit card at home for the holidays. Most will charge a 2.75% fee on any transaction. Compare cards for use abroad.
4. Be wary of balance transfers - 0% balance transfers are often found on reward credit cards - the idea is to lure you into spending and then trap your purchases on a higher rate of interest behind your cheap balance transfer debt. If you've got a current outstanding balance - transfer it to a separate 0% balance transfer credit card and keep your purchases on another reward credit card.
The way to make a reward credit card pay you is simply to not pay your credit card issuer anything (except what you've spent of course!)
If, after reading this article, you now find yourself in the market for a better reward credit card - make sure you compare reward credit cards by their real worth and find out how many points you'll earn on your spending.
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