Paul's Insights: Fifty bucks a year - Not much reward
In Australia’s crowded credit card market, plenty of cards are linked to reward programs. But according to ME Bank research, over half of reward-card holders say they’re getting rewards worth less than $50 annually. Close to two out of five believe their card is costing them money rather returning any value.
The first thing to be clear on is that reward cards come with high interest rates, often hovering around 20%. So unless you pay off the balance in full each – and every – month, the interest charge can quickly wipe out the value of any rewards. And don’t even get me started on the annual card fees, which can run into several hundreds of dollars.
The ME study also found that one in three people don’t understand how much value they’re getting from their card. That’s a worry given that many people only have a credit card in the hope of scoring rewards.
The best way to know if you’re getting decent value from your card rewards is to work out how many points it takes to get one dollar of reward.
Let’s say you need 5,000 points to get a free toaster. If the toaster normally sells for around $50 it’s going to cost you 100 points for each dollar of reward. Or maybe you could use 6,000 points to get two free movie tickets normally costing $40 – that works out to 150 points per dollar of reward.
As the toaster calls for fewer points per dollar of reward, it offers better value. But knowing this involves shopping around to work out the market value of your reward. It’s a fair bet most people don’t do this. After all, where’s the fun of it all if you have to spend time researching and crunching numbers?
Perhaps the bigger worry with reward cards is the psychological impact they can have. We all love a freebie, and the prospect of rewards can entice us to spend more on the card chasing points.
If the bait of rewards is seeing you spend up big on your credit card, it’s time to rethink the whole deal. There’s a reason why so many reward programs are on offer – they can be a big money spinner for banks and card issuers. But I can’t recall anyone ever getting rich on reward points.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
Many credit card reward programs may not be worth it for everyday investors. According to ME Bank research, over half of reward-card holders receive rewards worth less than $50 annually, and close to two out of five believe their card costs them more than it returns in value.
High interest rates, often around 20%, can quickly negate the value of any rewards if you don't pay off your balance in full each month. The interest charges can outweigh the benefits of the rewards, making it crucial to manage your card wisely.
To evaluate the value of your credit card rewards, calculate how many points it takes to earn one dollar of reward. Compare the points needed for different rewards to determine which offers better value. This involves understanding the market value of the rewards you are interested in.
One in three people don't understand the value of their credit card rewards, possibly because they don't take the time to research and calculate the true worth of their rewards. This lack of understanding can lead to poor financial decisions.
Reward programs can psychologically entice people to spend more on their credit cards in pursuit of points. This can lead to increased spending and potentially higher debt, which is why it's important to be mindful of your spending habits.
Potential downsides include high interest rates, annual fees, and the possibility of spending more than necessary to earn rewards. These factors can make reward programs less beneficial than they appear.
To determine if your rewards are providing good value, compare the points required for rewards to their market value. For example, if a toaster requires 5,000 points and normally costs $50, it offers better value than rewards requiring more points per dollar.
Banks and card issuers offer many reward programs because they can be profitable. The allure of rewards can lead to increased spending and interest payments, benefiting the issuers more than the cardholders.