As advisers, we get an interesting insight into the spending habits of our clients and their attitudes towards credit cards. With over 70% of the population having a credit card, with an average balance owing of $3,083, having a credit card is a part of our culture. Credit cards serve a valid purpose as they provide us with the flexibility to smooth out our cashflow, they can provide access to additional funds in the event of an emergency but they have also gotten a lot of our clients into trouble. It comes down to how you use it.
The area we want to address today is the attitude that ‘It’s all about the points.’ It’s an objection that we have heard a lot over the years when we have suggested that a client move away from using credit and instead use their money to fund their expenses. There are generally a multitude of reasons for this but ‘missing out on points’ is the most common reason to avoid this strategy.
The reality is you can ‘earn money’ from rewards programs if you use them properly. An example of this is redeeming points for gift cards for a major retailer which can be used to purchase anything from groceries to big ticket items. This is great, but if you have paid several thousand dollars in interest to get a $100 gift voucher the rewards program is hurting rather than helping you.
So the question is are credit card rewards programs worth it and if so, under what circumstances?
Most of our clients have never done the maths on what their rewards cards may actually be costing them if they are not being used correctly.
There are 5 key components to take into account in determining whether you are benefiting from your credit card or whether you are losing money because of it.
- Balance owing – As a general rule, if you are carrying forward a balance on your credit card and never pay the balance off, the interest you would be paying on your average card will be significantly more than any benefits you may be receiving. If you take advantage of the interest free period every month then this gives you a greater chance of benefiting from a rewards program.
- Annual Card Fee – Most rewards cards have an annual card fee attached. In order for a rewards program to be beneficial the rewards received should compensate you for the annual fee of the card.
- Average Spend – Whether a rewards program is going to benefit you ultimately comes down to your average spend. Your average spend would need to produce enough points to cover your card fee and provide additional benefits to justify the rewards program.
- Points per dollar – The final part in the equation is the amount of points you earn per dollar spent. Some banks may offer a more expensive card which offers 2 or 3 times more points per dollar spent. These cards generally come with a bigger credit limit and greater annual fee which will need to be taken into consideration.
- You – Maths aside, you are the most important component to take into consideration as to whether a rewards program is right for you. Credit card providers make their money on the premise that consumers will buy things they don’t need with money they don’t have. Rewards programs can be exploited to your benefit if only if you are disciplined, if not you are only hurting yourself.
In summary, yes it is possible to benefit from using credit card rewards programs, but only in the right circumstances. If you use your credit card to pay all your bills, clear the balance every month and your average spent provides you with more benefits than your annual card fee, you’re on a winner. It’s a simple as doing the maths.
|Card||Card 1||Card 2||Card 3||Card 4|
|Annual Card Fee||$300||$300||$300||$0|
|Points Per Dollar||1||1||2||2|
|Annual Points Accumulated||72000||72000||144000||144000|
|Value of Points in Gift Cards||$350||$350||$700||$700|
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