Beginners guide to reward credit cards

Reward credit cards are designed for earning points on eligible transactions. These points can be redeemed for rewards such as travel, merchandise, gift cards, electronics and more. However, deciding whether these credit cards are worth the hype means firstly understanding how they work.

How can I earn points?

With most reward cards, you’ll earn points for every $1 you spend on eligible purchases. You could earn 1, 1.25, 1.5, 2 or even 3 points for every dollar you spend. You can also sometimes earn points just for signing up for the reward credit card. You could earn anywhere between 10,000 and 150,000 bonus points.

What types of reward credit cards are there?

Each reward card offers different benefits depending on the scheme. Some may be linked to a frequent flyer scheme such as Qantas where you earn points when booking flights. Others may allow you to earn points when buying products at selected stores such as Coles.

Some common types of reward cards include:

• Platinum credit cards. These offer exclusive travel benefits such as travel insurance, gift vouchers and access to exclusive airline lounges.
• Cashback credit cards. These reward you with gift cards and cash for spending. Frequent shoppers can benefit as these cards allow you to accumulate points that can be redeemed for cash or give you back a percentage of your spending in cash.
• Petrol credit cards. These reward you for fueling your car at selected petrol stations. You can receive fuel vouchers or discounts with the points you accumulate.
• Frequent flyer credit cards. These allow you to earn points when booking flights and can be redeemed for priority check-in, discounts and upgrades at the airport.
• Reward credit cards. These offer points for spending on certain transactions such as purchases from a specific store. These points can generally be used to claim discounts at high-end stores or to offset the card’s annual fees.
• Bonus points credit cards. These are typically rolled out by banks. They offer higher points during certain periods, such as the first year that you sign up. These points can offset the card’s annual fees.

How do I pick the right card?

To compare reward credit cards, you should consider four important factors:

1. Consider the amount of points you earn per dollar spent. At a bare minimum, the card should offer at least 1 point per $1 spent.
2. Find out if the reward points expire after a certain amount of time or if there is a cap on how many points you can earn.
3. One of the fastest way to earn points is through bonus points. However, sometimes you’re required to spend a certain amount of money within the first few months before you can receive these bonus points, so keep this in mind when weighing up your options.
4. Find out what fees you’ll be charged. This includes annual fees, foreign transaction fees, the purchase rate, balance transfer fees, the cash advance rate, late payment fees and more.

How do I redeem my points?

Each provider will have their own way for you to redeem points. However, you should generally be able to log into your credit card account online and find the “Rewards” section. You will need a specific amount of points to redeem certain rewards, such as 12,000 points for a $50 gift card. Some programs will allow you to use a combination of points and money to redeem your chosen reward if you haven’t accumulated enough points.

Is there a catch?

Reward credit cards have many benefits, but there are some downsides too. Reward cards generally have higher standard interest rates and higher annual fees. A study conducted by finder.com.au revealed that on average, reward credit cards will cost you $182 in annual fees with an average interest rate of 19.58% p.a. On the other hand, non-reward credit cards will on average only cost you $49 in annual fees with an average interest rate of 14.65% p.a.

Ultimately, reward credit cards offer a range of perks that can really come in handy if you use them wisely. If you’re a frequent flyer, frequent shopper or you’re often having to fill up your car, the rewards you receive may outweigh the costs. However, if you don’t travel or shop very much, it may not be worth it. If you’re able to make it work for you, a reward credit card is a great way to go, but just be mindful of the costs involved.

Author: Bessie Hassan Money expert at finder.com.au