How to work out what’s better for you: credit card rewards or a low interest rate?
Rewards and low interest rates are two of the most popular features to look for in a new credit card, but they don’t often go hand-in-hand. Instead it’s more common for a card with low rates to have only basic features, while a card with rewards is more likely to have a high standard variable rate of interest. So if the choice between a low rate and rewards credit card leaves you scratching your head, read this guide to work out which type of credit card is right for you.
How to choose between a rewards credit card and a low interest credit card
Both rewards and low interest credit cards are designed to offer benefits for specific spending habits and needs. To put it simply, rewards credit cards offer the most benefits to people who use their card often and always pay back what they spend, while low rate cards offer some savings to people who frequently carry a balance. If both of these scenarios apply to you, then you can use the following questions to help weigh up rewards programs and low interest rates.
What’s your income?
Your regular salary can help narrow down your credit card comparison by looking at the minimum income requirements for different products. For example, a low rate credit card could be more accessible if you’re a low income earner, with minimum income requirements often starting at $15,000. Rewards credit cards tend to have a higher minimum income requirement than low rate credit cards as they are more premium products with higher credit limits.
How much do you want to pay?
Most credit cards come with an account fee that you have to pay on a yearly basis, which can vary significantly based on the type of card you choose. For example, most reward and frequent flyer cards have annual fees well above $100, while low rate credit cards frequently have fees of less than $100. You’ll want to make sure that the value you get from either the rewards or the savings from low interest outweigh the cost of the card, otherwise it’s not of benefit to you.
What’s your average monthly spend?
A rewards credit card is cost-effective if it gives more value than it takes. Put simply: you must spend enough on the card to recoup the cost of the annual fee in rewards value. So if your annual fee is $100, you would want to earn at least $100 worth of value through the rewards program. As most credit cards offer points per $1 spent, your average monthly spending can help you work out whether or not a card will be worth it for you.A common way to calculate this value is to look at the points required for a gift card, and then work out how much you would have to spend to redeem this reward (and offset the cost of the annual fee).
*For example, a Westpac Altitude Rewards credit card has an annual fee of $100 and requires 19,000 points to redeem a $100 Myer gift card. It offers 1 point per $1 spent on a Visa card linked to the account, and 2 points per $1 spent on an Amex card. That means you would have to spend between $9,500 on the Amex card and $19,000 on the Visa card to balance out the annual fee.
You can use this calculation for any credit card and any reward when working out whether the product is cost-effective for your annual spend.
Your monthly spend is also an important thing to consider with a low rate card. If the card has a 0% purchase rate, it’ll only be in place for a promotional period, so you’ll want to make sure you can pay off the amount you’ve charged to the card by the time the offer ends and the standard rate applies. If it’s a low (not 0%) interest rate, you’ll still need to consider your monthly spend to understand how much interest you could potentially accrue on what you charge. This will also help you determine whether the card is of value to you.
*Rates and figures used for example purposes only
Do you usually pay your balance in full?
When comparing rewards and low rate credit cards, ask yourself whether you’re able to pay off your account balance in full each month. This will help you decide whether a rewards credit card or low rate card is more affordable.
Rewards credit cards usually have high rates of interest, so you’ll accrue a higher amount of interest if you’re unable to pay your balance in full by the end of the month. As your interest charges grow, this will counteract the value you’re getting from your rewards.
If you do struggle to repay your balance each month, a low rate or 0% purchase credit card could be a more suitable option. Not only will you have lower interest costs, but you won’t have the promise of rewards tempting you to overspend.As you can see, there are many considerations to weigh up when deciding between a rewards credit card and a low rate card. Essentially, if you’re a big spender and frequent traveller who always pays their balance in full, a rewards credit card could be a great way to get extra value back from your spending. Otherwise, if you struggle to repay your balance each month and want to keep your card costs low, a low interest rate credit card could be the right option for you.