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Are rewards credit cards worth it?

Are rewards credit cards worth it?

When considering whether to get a rewards credit card, you might wonder if the perks are worth it. It largely depends on your spending habits and ability to manage credit responsibly. Rewards credit cards offer benefits like points, cashback, and other incentives that can be quite appealing.

However, these cards often come with higher annual fees and interest rates. For example, some cards charge fees as high as $450 and interest rates up to 20.99 per cent on purchases, as noted by ME Bank. These additional costs can quickly outweigh any benefits if you don’t pay off your balance each month.

Interestingly, studies have shown that women are better at managing credit cards and paying off debt. According to an Adelaide Now report, men have been proven to be bigger users of credit cards and worse at paying off debt.

This suggests that for women who are considering a rewards credit card, the benefits may be more likely to outweigh the costs, as they are more likely to use the card responsibly and avoid accruing interest charges.

The lowdown on rewards credit cards

Rewards credit cards offer unique incentives for users. They often provide points for purchases that can be redeemed for various perks.

It’s essential to understand how these cards operate, the kinds of rewards available, and the potential benefits they bring.

How rewards cards work

Rewards credit cards give you points, miles, or cashback for every dollar spent. When you use the card for purchases, you accumulate rewards based on the card’s terms. Some cards provide higher points for spending in specific categories like groceries or travel.

You typically log into the issuer’s online portal to redeem rewards and choose from available options. You may need to reach a certain point threshold before you can redeem. Tracking your spending and repayments is crucial to maximise benefits and avoid interest charges.

Common types of rewards

  • Points: Often used in general purchases and can be exchanged for gift cards, merchandise, or statement credits. These cards might include offers like the American Express Essential Rewards Credit Card that provides up to 80,000 membership rewards points for specific spends.
  • Miles: Ideal for frequent flyers, these rewards can be used for flights and travel perks. Cards such as the NAB Qantas Rewards Signature Card offer bonus points when you meet a certain spending criteria.
  • Cashback: Gives you a percentage of your spending back, usually credited to your account or sent as a check. Cashback can be particularly useful if you prefer direct financial benefits over goods or travel.

Emily, a 28-year-old marketing executive from Sydney, said using rewards credit cards has been a “game-changer” for her.

“By using my card for everyday expenses like groceries and petrol, I’ve accumulated enough points to redeem for a return flight to Bali last year – total game-changer. It was incredible to book a holiday without paying for the flights out of my own pocket,” she said.

Potential benefits

One major benefit is the chance to earn rewards for everyday spending. Whether it’s groceries, dining, or travel, you accumulate points, miles, or cashback. For example, using a card like American Express can help you gather significant rewards over time.

Additionally, these cards often come with perks like travel insurance, purchase protection, and extended warranties. Although fees can be high, strategic use can offset costs. For instance, according to Finty, the average annual fee is about $182, but the rewards can surpass these expenses if managed wisely.

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The value of rewards

When considering rewards credit cards, it’s important to understand how to determine the value of the points you earn, the types of redemption options available, and the fine print that affects your rewards.

Sarah, a 35-year-old entrepreneur from Melbourne, explained that you should “calculate the point valuation” before redeeming them.

“I always calculate the point valuation before redeeming them. For instance, I recently redeemed 50,000 points for a $750 flight, which meant each point was worth 1.5 cents. That’s a pretty good deal in my books,” she said.

Point valuation

Point valuation is key to knowing the true worth of your rewards. For instance, the value of points can vary significantly between programs. Some points might be worth one cent each, while others could be worth two cents.

To calculate the value, divide the dollar value of the reward by the number of points needed. For example, if a $400 flight requires 35,000 points, each point is worth approximately 1.14 cents. This calculation helps you understand the real value of your points and decide if it’s worth using them for a specific reward.

Reward redemption options

Different cards offer various ways to redeem points. You might use them for travel, cashback, gift cards, or merchandise. Travel redemptions often provide the highest value. For example, some cards offer higher value when you book flights or hotels through their travel portals.

Cashback is another popular option, allowing you to get back a percentage of your spending. Ensure that you understand the redemption process for each option, as some might require a minimum number of points.

The fine print

The fine print of reward programs can have a significant impact. Look out for factors like expiration dates on points, blackout dates for travel bookings, and caps on the amount of rewards you can earn.

Also, be aware of any fees associated with the card, such as annual fees or foreign transaction fees. These can negate the value of the rewards you earn. Reading and understanding the terms and conditions will prevent surprises and help you maximise your benefits.

Comparing reward credit cards

It’s crucial to compare your options carefully and look at several key factors. These include annual fees, interest rates, and the various bonus offers available.

Dedicated credit card comparison websites like allow you to compare all of Australia’s credit cards on the market and see which cards provide the best rewards side by side. This can help you determine if a rewards credit card is right for your financial situation.

Steve Hui from iFlyFlat shared his insights on how the average person can leverage credit card points to experience first-class travel in an interview with Luxury Travel Magazine. He advised to “look for cards that offer bonus points on categories where you spend the most, whether that’s groceries, dining, or travel. And, always watch for promotions that allow you to earn extra points”.

Annual fees

Annual fees can vary widely among rewards credit cards. Some cards offer no annual fee, while others might charge more than $400. For example, the NAB Qantas Rewards Signature Card charges $295 for the first year, which reverts to $395 after that.

You should consider whether the rewards and benefits outweigh the cost of the annual fee. If you plan to use the card frequently and take full advantage of the rewards program, a higher annual fee might be worth it.

On the other hand, if you don’t use the rewards often, a card with no or low annual fee might be better for you. Always make sure to read the fine print and understand what you’re getting for the annual fee.

Interest rates

Interest rates on rewards credit cards can also vary. Most rewards cards have higher interest rates compared to regular credit cards because of the benefits they offer. For instance, ANZ Reward Points have notable bonus point opportunities, but you should also consider what interest rate you might end up paying if you carry a balance.

If you plan to pay off your balance in full each month, the interest rate might not be a major concern. However, if you think you might carry a balance, it’s crucial to compare the interest rates of different cards to find the most affordable option.

High interest rates can quickly offset the value of any rewards earned, making it important to avoid carrying a balance whenever possible.

Bonus offers

Bonus offers can provide a great initial boost to your rewards balance. Many cards offer substantial bonuses if you meet certain spending requirements within the first few months. For example, the NAB Qantas Rewards Signature Card offers 100,000 bonus points if you spend $3,000 in the first 60 days, plus another 30,000 points after your first-year anniversary.

Similarly, the American Express Platinum Charge Card offers up to 150,000 membership rewards points when you spend a required amount shortly after opening the account.

These bonus offers can be very appealing, but they should be weighed against potential annual fees and interest rates. It’s also important to ensure that the spending requirements align with your typical spending habits, so you don’t end up overspending just to earn the bonuses.

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Maximising credit card rewards

To get the most out of your rewards credit cards, focus on strategic spending, combine cards to get the best value, and leverage partnerships with rewards programs.

Strategic spending

Strategic spending is key to maximising your credit card rewards. Choose a card that aligns with your regular expenses. For instance, if you spend a lot on groceries, opt for a card that offers high rewards on supermarket purchases.

Understanding your spending habits can help you select the best card for each category. Some cards offer bonus points on particular types of spending, such as dining or travel.

Always remember to pay off your credit card balance in full each month. This will help you avoid interest charges and keep your rewards truly beneficial.

Combining cards for maximum value

Combining different credit cards can enhance your rewards. Use a cashback card for daily purchases and a travel rewards card for travel expenses. This way, you get the best rewards for each type of spending.

Some experts suggest using multiple cards, each for different categories. For example, one card for fuel, another for groceries, and a third for travel. This method ensures you get the highest rewards rate for each category.

Balancing cards with no annual fees alongside premium cards can also be effective. Ensure the rewards you earn offset any fees you may pay.

Rewards programs partnerships

Partnerships between credit card companies and rewards programs can significantly boost your points. For example, some cards let you transfer points to airline or hotel loyalty programs, sometimes at better rates.

Look for cards that have relationships with multiple partners. These cards often offer special promotions, allowing you to earn extra points or discounts.

Some credit cards offer access to exclusive deals or higher reward rates with partner companies. Stay informed about these partnerships to make the most of your points.

Consider the downsides

While rewards credit cards can offer benefits like cashback and points, they also come with several potential downsides that you should consider before applying.

Potential costs

Rewards credit cards often have various fees. Annual fees can range from modest to quite high, which might outweigh the benefits if you don’t use the card heavily. Additionally, there might be processing fees for certain transactions.

Interest rates can also be a significant cost. Even if a card offers an interest-free period, if you carry a balance beyond that, you could end up paying high interest charges.

Sometimes, there are foreign transaction fees when using the card abroad. Ensuring you understand all associated costs is crucial before committing to a rewards credit card.

Credit score impact

Using a rewards credit card can impact your credit score in various ways. Frequently applying for new cards can lead to multiple hard inquiries on your credit report, which may temporarily lower your score.

If you max out your credit card or carry too high a balance, your credit score will be lower. Your credit score is partially calculated by your debt-to-credit ratio, as per SRG Finance. Paying off your balance in full each month can mitigate this risk.

Additionally, closing a credit card can shorten your credit history length, potentially lowering your credit score. It’s important to be mindful of these factors and manage your credit responsibly.

Overspending risks

The lure of earning rewards points or cashback might encourage you to spend more than you typically would. This overspending can lead to excessive debt if not managed carefully.

Impulse purchases can become more tempting when you’re trying to hit spend thresholds to earn bonuses. Consider creating a budget to track your spending and ensure that you’re not buying items you don’t need just to earn rewards.

It’s also easy to lose track of how much you’re charging to your card if you’re only focusing on the benefits. Regularly monitor your account to avoid surprise charges at the end of the month.

If you find yourself struggling to pay off your debt, seek credit card help immediately – you’re not alone!