How To Choose A Credit Card Rewards Program

15 June 2016

Hints and tips on how to select some of the best rewards cards for you.

Reward programs attached to credit cards are sophisticated loyalty programs which reward card holders who use the card as their preferred payment option. There are several different types of rewards programs but they all work on the same premise that the more you use the greater the rewards.

Common types of rewards programs

Card users earns points towards their preferred airline Frequent Flyer program based on how much they spend on their card. Frequent Flyer rewards can also include travel insurance, concierge services and merchandise. Often you can earn bonus points for buying your flights on your credit card as well. These cards are popular with traditional frequent flyers, but also among people who save up their points for years for long distance, or even round-the-world flights.

If you’re a shopaholic, cards that offer redemption at stores you love could prove enticing. Merchandise rewards come in a wide variety of offers. They could include tickets to major sporting or concert events, gift cards, fine dining, holiday accommodation, fashion. The list of merchandise offered by credit card rewards programs is endless and it can be a great way to redeem something that little bit special for you or your family.

Cash-Back Rewards

Cashback cards are the closest thing to a rewards card that appeal to just about anyone. As the name implies, these cards reward you by refunding a certain percentage (usually from 0.5-1%) of all your spending. If you are comfortable doing most or all of your spending with the credit card to maximize your cash back rewards, this is a good option.

Instant Rewards

Mostly there are no points needed for an instant reward. The card user receives instant benefits for using the card at participating merchants. This could mean an automatic discount, a 2-for-1 offer, buy 4 items and get the 5th free and so forth.

What credit card reward is right for you? Choosing a credit card reward program

Here at CANSTAR, we’ve done the hard work for you and you can see a comparison of more than 100 rewards cards on our website to figure out which one could suit your needs. When you’re looking at the different cards available, the “best” rewards program comes down to a few factors:

  • What type of reward you are most likely to use
  • How much you spend per year on your card
  • Whether the card costs are less than the rewards

When choosing a rewards program, it is important that you find a program that complements your credit card usage behaviour. If you use your credit card frequently and pay off your entire bill each month, a traditional or points-based rewards card might be worth looking at.

Naturally, it makes sense to gravitate towards the kind of rewards that appeal to you when choosing the right card and rewards program.

Aside from rewards appeal, factor in how much you spend on the card per year. A realistic total will give you added information about the value you can expect from some programs. For instance, Canstar rates rewards programs on four different spending levels per year: $12,000/year, $24,000/year, $60,000/year, and $120,000/year.

Ask yourself the following…

  • Does this rewards program suit my credit card usage habits?
  • Does the rewards program offer rewards that I am interested in?
  • Are there any costs associated with being a member of the rewards program?
  • How many points do I earn for every $1 I spend, and what are these points worth?
  • Is the annual fee for the card worth the amount of rewards I can earn?
  • Are points capped?
  • Can I get bonus points and where?
  • What is the life of my rewards points? Do the rewards points expire?
  • How much do I have to spend to get the rewards that I want? Will I usually spend that much?
  • Is it easy to redeem my rewards points?

Keep in mind!

If you are unable to pay off your entire balance for more than 2 months each year then a cash-back or instant rewards program might be more suitable for you. For each month that you can’t pay off your balance, you will incur interest charges which reduce the value you could gain from having a points-based rewards program.

Choose a reward you’ll actually use

It’s not all about frequent flyer points. Different cards offer different rewards in different forms and sizes, and some may be harder for you to redeem than others. If the rewards on offer for a card aren’t going to provide you with a material benefit, look for something else. Many rewards cards are now also universally-friendly, as they offer rewards points that can be redeemed in a wide variety of ways and for different types of rewards.

Choose a card that suits your spending level

Choose a rewards credit card that matches the amount of money you spend on credit every year. We rate rewards cards according to four different yearly spending categories: $12,000/year, $24,000/year, $60,000/year, and $120,000/year.

If you’re managing to pay off a large balance on your card every month, then you could be reaping the benefits of a good rewards card. You can figure out your spending profile from your monthly credit card bill – is it for $1,000, $2,000, $5,000, or $10,000 and up?

Rewards cards can give you incentive to spend more on credit, but remember to be disciplined. We don’t want to add to the massive amount of credit card debt in Australia. If you don’t use your credit card much or you don’t actually need one, then signing up for a rewards credit card wouldn’t be worth it for you and could cause unnecessary debt.

Choose a card where the rewards outweigh the cost

Whether or not a card is good value depends on whether the rewards earned each year cancel out the high costs of owning the card. You might not enjoy it, but reading the fine print in your credit card’s product disclosure statement is vital. You need to know whether there are any extra exemptions or fees that would make your ‘rewards’ useless.

Annual fee: You can work out whether the fee is worth it by calculating the net rewards return from the dollar value of points earned each year, less the annual fee.

For example, let’s say you spend $24,000 in a year and earned 24,000 points. Divide the number of points earned by the number of points needed to earn $1 back. You want a high ‘earn rate’ so you can build points quickly, but those points need to be worth something.

If your card gives you 150 points to the dollar, you’ve earned $160 in rewards that year. Then subtract your $100 annual fee, and you’re left with $60 of extra rewards earned that year. However, if you only spent $12,000 that year, that only earned $80 in rewards and didn’t cover the $100 annual fee.

Interest rate: The higher interest rates of between 19% and 22% for rewards cards can be dangerous for non-disciplined spenders. If you’re paying any interest, the card quickly gets far too expensive to be worth it. You want to know you can pay off the balance before any interest gets charged.

Paying the monthly bill: If you can’t pay off your card balance in full every month, the bank won’t let you earn as many (or sometimes any) rewards points.

Look for good bonus offers

There are a few ways to make the most of the free benefits on a rewards credit card.

Look for bonus offers to boost your points balance. Many cards offer a lump sum of bonus points just for signing up, often with conditions or a shorter expiry time attached.

Also remember to use any helpful extras that come with the card, such as free travel insurance or concierge services. Check that cards with these extra benefits don’t have a higher annual fee.

Certain cards earn more points from certain partner businesses. You might have a higher earn rate when you spend at the supermarket than at service stations or restaurants. Know where your card will be the most valuable to you.

Check for silent points killers

Points redeeming: Some cards make it more difficult to redeem rewards than others. For example, you might have saved up enough frequent flyer points for a posh business-class flight overseas, but if the airline doesn’t allocate any frequent flyer seats on the flight you want, the points are worthless.

Points capping: Many cards have a cap on the number of points you can earn in a year. Make sure that the limit is not so low that it stops you from getting any value out of the card.

Points expiry: Choose a card where points don’t expire in a hurry. It would be heart-breaking to save up 500,000 points for a holiday and then see them disappear before you book the flight. Thankfully, many cards have rewards points that do not expire.

Point currency and reward return

A reward program is only valuable if it returns a greater value to you than it cost you to be a member. When deciding about a rewards program, you should always try to establish if you will be able to extract value from the program.

Canstar has introduced two concepts to compare rewards programs. You can use these concepts to quickly compare the value of the rewards programs you are interested in. These concepts are point currency and reward return.

Point Currency

Point currency captures the spending value of your reward points. Point currency is simply how many points you need to convert to get $1 of a reward. This allows you to compare rewards programs at the lowest common denominator.

For example, if you need 7,000 points to redeem a $50 gift card, the point currency is 140 points for each $1. The point currency is like a conversion rate so when comparing point currencies the lower the number the better.

Important: conversion rates for rewards points varies from one reward to the next so if you’re interested in another reward, you should recalculate the point currency. You can also use the point currency to determine which reward is giving you a better deal.

Reward Return

Reward return tells you the return you should get from a rewards program based on your annual credit card spend. Reward return simply tells you that if you earn this number of points each year you can expect $$$ worth of a particular reward. You can then compare this reward amount against the cost of the rewards program (such as the annual fee) to see if you’re paying more than it’s worth for your rewards program.

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