Reward Credit Cards Explained, in Detail

Rewards credit cards have a real attraction about them. Earning bonuses like flights, merchandise, cash back and more as you do your weekly spending is definitely a grabbing concept. But as with anything in life, nothing much is truly free and if you don’t understand the catches and fine print, you just won’t get what you hoped for!

For this reason we’re going to try to help you wade through the ins and outs of this type of credit card, give you an idea of what to look for, what to look out for and how to make a good decision about a rewarding credit card that will indeed be worth your while.

Specific Types of Rewards Cards

• Car rental credit cards – earn points and redeem them for cheaper car rentals and insurance cover
• Hotel credit cards – earn points and redeem them for hotel stays
• Petrol credit cards – save money at the pumps
• Retail rewards credit cards – earn points and shopping vouchers
• Sign up bonus credit cards – compare cards that give you bonus rewards points when you sign up or make your first purchase
• Travel insurance credit cards – get a card wtih complimentary travel insurance
• Velocity credit cards – earn Velocity Points on purchases with your card

What is a Rewards Credit Card?

It’s a credit card which offers the feature of being able to earn points or rewards while you use it for your spending. As you accumulate points, you can redeem them for flights, hotel bookings, merchandise, gift cards, products and services or cash back. Each card will vary in the rewards Program it offers and how you can earn and redeem points meaning one card is not just as good as another. There are some that will work well for you, and others that won’t benefit you at all!

Who Benefits Most From a Reward Credit Card?

Not everyone will benefit from a rewards credit card so it is important to figure out whether one will work for you or not. There are some basic question you can ask and answer that will help you figure this out. These include:

• Do I travel a lot for business? If you do, chances are you’ll be spending enough on flights and hotels and other things to earn good points toward more flights and hotel stays. You’ll also use the flights or hotel offers you can earn, because you’d be travelling anyway. Keep in mind that not all reward points programs give you the option of redeeming points for travel, but most do.
• Do I travel a lot for pleasure? If you do, likewise, you can earn and redeem good points on your trips.
• Do you have a high monthly spend? If your income is substantial and you’re spending more than, say, $2,000 per month, you’ll be able to earn good points whether you travel or not. You can also choose a rewards program credit card that best suits you and the things you could actually use points for. If you don’t spend more than this, many cards won’t actually benefit you, especially once you’ve considered annual fees or the membership fees that some rewards programs charge. They might cost you more than they give you and you definitely don’t want that!
• Are you a homebody? If you are, you probably want to make sure you go for a rewards program that allows you to redeem your points for something other than travel. Gift cards, merchandise and cash back might be more up your alley. Again, remember that you’d need to be spending enough to earn the points you need.
• Do you actually use a credit card? Some people can and do function quite well with the use of mainly cash and debit cards. Perhaps they just have a credit card for emergencies but prefer not to use it on their day-to-day spending. If this is you, you won’t be earning many points unless you’re happy to change your lifestyle and use your credit card for everything, making sure you pay back the balance on time each month of course. If you already use a credit card regularly or could see yourself doing so responsibly, a rewards credit card might be something useful to you.
• Do you have a good credit rating? For a start, if you have a poor credit rating you might have trouble getting approval for a new credit card and this could damage your credit rating, so be careful. Secondly, having a rewards program credit card can tempt some to overspend, thinking they’ll be earning lots of points for it. This is an unwise move, which we’ll explain fully below.

Q: How can a reward credit card benefit me? A: If you spend enough, you can earn loads of points which you can then redeem for a variety of shiny things! If you can find a card that has a good points earning rate and that enables you to redeem points for things you actually want or need, you’ll be laughing. You just want to make sure it’s a good card in other ways too. Some cards may have a great rewards program but terrible interest rates or a lack of other features to the detriment of the cardholder.

Q: What types of rewards are available? A: They vary. There are a host of programs with which you can redeem your points for flights. Make sure you check whether they’re just redeemable with specific airlines, like Qantas or Virgin, or whether you can choose between a good selection of reputable airlines.

Other credit cards designed for travellers allow you to redeem your points for things like hotel stays. Sometimes you have to book through certain partner travel agencies though or with certain hotel brands, so check to see how much freedom you actually have. If you’re a traveller, you might also want to check if you get complimentary travel insurance included in the features of the card.

If travel isn’t your thing, you’ll be looking for other ways to redeem points. Many programs have online stores where you can purchase a range of products and merchandise. Everything from watches, to technical gadgets, to cologne and jewellery. Have a look at the store before you sign up and make sure they sell things you’d actually want or need and that items are a good deal.

Fourthly, you can redeem points for gift cards or cash back. Sometimes it is more efficient to do one rather than the other so you want to read the fine print.

As you can see, there are a lot of options in terms of points redemption. You obviously want to pick a reward program that suits what you’re after so take the time to really understand what you can do with the points you earn before you sign up.

Q: How can you tell a good rewards program from a bad one? A: In a sense, this is the most important question of all. Few people actually do much research before they apply for a credit card and many just go with the bank they have an account with. In doing so however, they may be missing out on some much better deals, so it’s really worthwhile knowing how to pick a good card.

When it comes to rewards schemes there are a number of things you want to look out for. These include:

• Good points:dollar value – When you’re looking around at rewards programs you’ll notice that there will be a certain amount of points you can earn per dollar spent. It’s usually 1 point per $1 spent, but sometimes goes as high as 3 points per $1 spent. The problem is this rate can be very deceiving because the rate is not easily comparable between rewards programs. A point with one program is not equivalent to a point with another program. So what’s the deal? Well, what you want to do is work out how a point translates back into dollar value in each program. If you need 4,000 points to get a $30 gift card, it’ll take you 133.3 points for $1 worth of rewards. This means each point is worth about .7 of a cent. And what they’re worth will vary from program to program and even how you spend your points can change their value. As you can see, it gets pretty complicated pretty quickly and the different point dollar values that aren’t obvious unless you do the maths mean many people end up with bad deals. What you want to do is take the time to get a clear picture of what you’re actually getting when it comes to points value. If you don’t, your points may be getting you more or less nowhere with better deals out there you could be benefiting from.

• No limiting points capping and expiry – Another issue to be aware of is that some reward points have points capping, meaning they limit the amount of points you can earn in say, a year. For the big spender particularly, this can be limiting and frustrating so you want to make sure you check if there are any caps and whether they are likely to limit your points earning potential. Secondly, some points expire. This is a frustration for the lower spender who might take a while to build up enough points to get anything of real value. You don’t want to plod away slowly only to find that those hard earned points have expired on you! Both capping and expiry information will be found in the small print of the program.

• Worthwhile annual fees – Another thing to look out for is both the annual fee of the credit card itself and whether there are annual or start up fees involved in signing up and benefiting from the rewards. At times the fees can be high enough to make it very difficult to benefit from the rewards. This is another reason why being a high spender is usually the best way to get good rewards. Again, the fees that come with a card or program will be found in the information and fine print of the deal being offered. Make sure you look out for this and include it in your calculations as you figure out whether the card is worth your while.

• Competitive rates – Many times credit cards with rewards points come with both higher fees and interest rates. In a sense, you get what you pay for and the credit card provider is making sure you’re not going to cost them anything more than they’re willing to give. Sometimes people can get all excited about a rewards program’s potential, forgetting that the interest rate on such a card may be higher, and then find themselves stung by interest when they make a late payment, wiping out many of their rewards at the same time. You want a card that has a good program but as a card is also competitive in its rates and other features and benefits. A card is a bad deal if it has a good rewards program but lacks in everything else.

• Flexibility – One more thing that’s worth looking out for is the flexibility of the program. For example, you might look into whether air miles can be traded for cash back or gift certificates if you know you’re not going to use the miles.

• Ease of points redemption – As mentioned, you want to pick a program that will get you merchandise or discounts that you actually want and need. Secondly, you want to look into how easily points can be redeemed. Unfortunately, some companies make it quite difficult to redeem points in the hope that people won’t bother. You might have to squint through the depths of the fine print to find out how on earth to get something back for your points, which is probably the last thing you want to do. Look for a rewards points program that makes redemption simple and straight forward. Some even offer automated redemption where say cash back goes straight into your account at the end of the month based on the points you’ve earned.

• Bonus points – As an introductory offer, many reward credit cards will offer you the opportunity to earn bonus points. Sounds great but you just want to make sure that the catches don’t catch you out. Sometimes to get them you have to spend a lot of money or shop in a particular store. If you don’t, you won’t get them. So make sure whatever they’re selling will actually benefit you.

Q: Do balance transfers and cash advances earn reward points? A: One last thing to make sure you’re aware of is that you cannot earn points on balance transfers or cash advances, in fact transferring a balance, especially a big balance to a rewards card which may have higher interest rates than other cards is the last thing you want to do as it can easily impact on your points earning. And the general rule with cash advances on credit cards is simply to avoid unless in case of an emergency!

Q: How can you compare reward credit cards? A: Comparing them thoroughly will pay off in the end so you may as well invest the time and do it. Narrow your search down to the 3-5 cards that are most likely to suit you and then get nitty gritty with the reward programs they offer. Use the comparison features on our website to do some comparing or alternatively draw up a table with the above categories (e.g. annual fees, bonus points, point:dollar ratio etc.) and work out how they all go, listing it in the table next to each corresponding card you’re researching. At the end, see how they all fair and pick the best one, which is the one that best suits your lifestyle, spending and the ways in which you could best use rewards.

Q: How do I know if I qualify? A: To qualify for most credit cards you’ll need to be over 18, an Australian resident and meet or exceed the minimum income required. Your credit history will come into play. Cards will vary somewhat so just make sure you meet the specific requirements of the card you decide you want to apply for.

Q: How do I apply? A: Make sure you qualify for the card, that you have a few minutes to spare, hit 'Apply’ and make your way through the process. Application processing varies from provider to provider, but generally takes about two weeks.