Rewards cards are part of a loyalty program system that have become a standard all over the world in every field of business.
The purpose of rewards cards or ‘loyalty cards‘ as they’re also known, is to repay consumers for loyalty and responsible purchasing practices. This concept of giving back to consumers that has contributed to the rising popularity of these cards.
But to properly reap the rewards, consumers must spend money regularly and abundantly, which for some can lead to serious financial problems. For others, who are in control of their finances, rewards credit cards mean they can benefit from all types of treats.
Did you know 82% of Australians are members of loyalty programs, however, less than a third (31%) actually use them to redeem discounts! Source: Voyeur Magazine, Jan 2010
Pros and cons of a rewards credit card
- Complimentary rewards
The point of rewards cards is to get you to use your cards to spend money, but this can cause problems if you don’t pay your bills on time. For those that do, there are a multitude of rewards to choose from to keep the you excited enough to continue shopping. When the cardholder uses the card, there’s an immediate reward, either from a discount on the merchandise or service they’re purchasing, a certain percentage of cash back, or points that are acquired to use for future purchases or services.
- Rewards for loyalty
Banks and credit card companies are big on loyalty programs, offering numerous rewards to customers for their patronage. Some of the types of cards offered are travel, airline and fuel rewards. These cards provide the cardholder with benefits like frequent flyer miles, cash, car rentals, merchandise, gift certificates, hotel benefits, and free or discounted pricing on fuel and groceries. When used wisely, you can get more value and savings with your rewards card.
- Choice of incentives
You can review the rewards that come with various cards and choose the card that best suits your lifestyle. Frequent flyer programs also have cards that reward their customers with air miles, hotel and car rental discounts. For instance, some creditors will offer a substantial amount of air miles after the first purchase and some offer a significant amount of air miles just for signing up. On the other hand, consumers with families who don’t travel so much can choose the cards that specialise in cashback, home improvement and home furnishing rewards.
- Complimentary travel insurance
Reward credit cards often come with complimentary insurance. Types of coverage under travel insurance can cover lost, stolen, damaged or delayed luggage, flight cancellations and interruptions, travel accident insurance, and 24/7 travel assistance. Consumers should note that the length of time the coverage is in effect varies from card to card.
- Cashback deals
The reward of cash back is perhaps one of the most popular incentives because you can receive a specified amount of cash back after spending a certain amount of money within a set period of time. Customers can continue to receive a stated percentage of cash back on future purchases and for many cards there’s no limit on how much cash can be earned. It’s always enticing to get cash back in return for spending money for increased value of your purchases.
- Save money on groceries
Specific supermarkets and pharmacies advertise loyalty prices that are available only with their supermarket rewards cards. When you present the rewards card for payment, you have access to these discounted prices and could see a fair savings on your grocery and pharmaceutical bills. You can receive savings instantly on hundreds of items and you can earn points for future purchases in supermarkets and pharmacies. Some rewards cards also offer select coupons and bonus opportunities that are designed exclusively for the cardholders.
- May make you spend more
Offering rewards for specific merchandise and services can be a tremendous influence on your purchasing decisions that may cause them to make purchases that aren’t necessarily in their best interest. As a result, you may buy merchandise or services you don’t really need, or even spend more money than initially intended just for the purpose of accumulating rewards or points. This falls under the category of thoughtless spending, which could lead people into deep financial holes that are difficult to recover from, thereby having lasting negative effects on your credit file.
- Easy to miscalculate real benefit
It certain circumstances, you may have to spend a lot in order to truly benefit from the rewards offered. For instance, the cashback rates are usually between 1% to 5%, so you would have to spend a couple thousand dollars just to receive a reasonable cash return. For air miles, the range could be 1 to 2 miles for every dollar spent, so again a significant amount of money would have to be spent to earn enough miles to use for frequent or long trips.
- Exorbitant interest rates
An even closer look at the terms and conditions may also reveal that interest rates on the card are relatively high and if there are also annual fees, the combination of the interest rate and annual fee could cancel out the rewards that are offered. Any savings gained on rewards is lost through interest. It must be kept in mind that there are heavy costs involved for the issuer so they have to establish ways to pay for these rewards without incurring losses.
- Problems when payments missed
To ensure beneficial returns on a rewards card, consumers may either need to pay down their balances in full each month to avoid paying interest, and look for a rewards card that doesn’t have an annual fee. Some rewards cards have no annual fee and an introductory 0% Annual Percentage Rate (APR) that lasts for up to a year, but many of them have both an annual fee and an extremely high APR. Consumers should take the time to shop around for the best deal.
- Can be restrictive
There are always restrictions on rewards cards and unfortunately sometimes these restrictions aren’t apparent at first. Some of the most common oversights deal with frequent flyer miles where card users can only redeem their miles with specific airlines or there are blackout dates and expiration dates. Further restrictions may involve annual spending limits that cardholders must reach to avoid the penalty of reduced rewards. Although it can be tedious, people who are applying for rewards cards should always read the fine print before signing on the dotted line.
- Changing terms and conditions
The terms and restrictions on all rewards cards vary immensely. You should always read the conditions section of the contracts and know that those that have fewer restrictions offer fewer or less valuable rewards. Consumers should determine the approximate amount of money they may be required to spend with a particular rewards card because, with most of these cards, the greatest benefits are only achieved when certain spending levels are met. Rules can change with very little warning, so consumers need to stay informed or they could lose valuable rewards.
- Points are capped or can expire
On most reward credit cards, the points are capped or they expire. This can be an issue if you’re trying to accumulate your points for a big flights or a big reward. If this is the case, always read the terms and conditions before committing to anything.
For those who are employed in businesses that require them to spend money to make money, or for those who can afford extravagance in their lifestyles, there are advantages to having a rewards card. Loyalty cards are not for the financially feeble. Only consumers with good credit files may be approved. However, if you’re thinking about applying for a rewards card you should be aware of the fact that in order to enjoy the benefits of the rewards, they’ll have to set up a pattern of spending that’s maintained on a regular basis, and the money spent has to be a sufficient amount. Otherwise, having a rewards card is a financial obligation that may turn into financial burden.