Are Rewards Credit Cards worth the effort?
Posted May 10th, 2011 and last modified December 28th, 2011
Rewards credit cards can be worth it if you keep your spending and repayments under control
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. It’s this precise element of giving back to consumers that has contributed to the rising popularity of these cards.
However, in order to 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. So are they for you, or aren’t they?
Pros
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 20101. Free Rewards
The point of rewards cards is to get people to use their 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 customer revved up enough to happily 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.
2. 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, customers can realise huge returns and savings with their rewards card.
3. Choice of Incentives
Consumers can review the rewards that come with various cards and choose the card that best suits their lifestyles. Frequent flyers can choose the 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 specialize in cash back, home improvement and home furnishing rewards.
4. Free Travel Insurance
Another incentive for frequent flyers is they can also receive free travel insurance when using loyalty cards. Insurance is always a worthy product to have, but cardholders should thoroughly check to see exactly what this service covers. 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.
The reward of cash back is perhaps one of the grandest incentives that loyalty programs offer. With this incentive, customers can receive a specified amount of cash back after spending an agreed-upon amount of money within a set period of time. Thereafter, 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 so in this respect, using a rewards card is definitely appealing.
6. Save Money on Groceries
Specific supermarkets and pharmacies advertise loyalty prices that are available only to users with their supermarket rewards cards. When consumers present the rewards card for payment, they have access to these discounted prices and therefore see a fair savings in their grocery and pharmaceutical bills. Customers can receive savings instantly on hundreds of items and they 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.
Cons
1. May Make You Spend More
Offering rewards for specific merchandise and services can be a tremendous influence on the consumer’s purchasing decisions that may cause them to make purchases that aren’t necessarily in their best interest. Consequently, consumers may buy merchandise or services they 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 their financial futures.
2. Easy to Miscalculate Real Benefit
It certain circumstances, it may become evident that consumers will have to spend a lot in order to truly benefit from the rewards offered. For instance, the cash back rates are usually between 1 to 5%, so a customer 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.
3. Exorbitant Interest Rates
An even closer look at the contract may also reveal that interest rates on the card are preposterously 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, i.e., 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 exorbitant losses. This usually means the customer will pay, sometimes in amounts that seem outrageous, to receive the rewards given.
4. Problems When Payments Missed
To insure beneficial returns on a rewards card, it’s highly advisable that consumers (a) pay down their balances in full each month to avoid paying interest; and (b) look for a card that doesn’t have an annual fee. Some rewards cards have no annual fee and an introductory 0% 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.
5. Can Be Restrictive
There are always restrictions on rewards cards and, unfortunately, sometimes these restrictions aren’t apparent at first glance. Some of the most common oversights deal with frequent flyer miles where (a) card users can only redeem their miles with specific airlines; (b) there are blackout dates; and (c) there are 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.
6. Changing Terms and Conditions
The terms and restrictions on all rewards cards vary immensely. Customers should 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.
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 superb advantages to having a rewards card. As may be expected, loyalty cards are not for the financially feeble. Only consumers with excellent credit histories will be approved. However, everyone who applies for a rewards card should remain acutely 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 could abruptly turn into a financial burden.
Additional Reading & Helpful Resources:
- Qantas Frequent Flyer rewards program
- V Australia & Virgin Australia’s loyalty program
- American Express Rewards program
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