Many people think of credit cards as the bad guys of banking; interest hikes, late payment fees and the constant temptation to spend a little more.
However, more people are getting wise to the fact that if you’re clever and disciplined, you can make credit cards work hard for you and actually save you money.
According to the British Banker’s Association, more than 75 per cent of credit cards bear interest (January, 2007). But if you do manage to pay your balance off in total each month, thus avoiding the interest, then choosing the right type of card could make you money, save you money or get you some great freebies.
What are reward credit cards?
Reward credit cards are a catch-all term for cards that reward their customer’s spending. Taking out a reward card means that essentially the more you spend the more you will make. They come in three forms; loyalty cards, points schemes and Airmiles.
Be careful though, as it can be tempting to use your rewards scheme as an excuse to buy loads of stuff that you don’t need - to use them properly you need to be disciplined.
What’s the difference between the three types of reward card?
Loyalty cards: As the name indicates, loyalty cards encourage you to be loyal to the company providing your credit, often by earning more points if you use your card in their store and then by spending your points with them too.
If you get a loyalty card from a company you already spend with, then you’ll be able to redeem your points on things you would be buying anyway. This is the idea behind the supermarket loyalty credit cards and cards that allow you to save on your household bills.
The Tesco Clubcard credit card is the current best buy offering five points for every £4 spent and zero per cent interest on Tesco purchases.
Cashback cards: Because cashback cards offer actual money in exchange for your spending, they offer the best value since you can then spend the money on whatever you want, whenever you want. They often have limits to how much cash will be paid out, but using your card to pay bills and for everyday use could see you taking home a tidy sum.
The current best buy cashback card is the Capital One Cashback card which offers four per cent on purchases for the first four months then one per cent cashback thereafter.
Airmiles cards: These cards are now in their 19th year and although they’re not as competitive as they used to be, they are still going strong. Admittedly, you do have to spend a lot on them to be able to claim a flight, but once you do you’ll be able to treat yourself to a well-deserved break courtesy of your credit card company.
Most Airmiles cards are pretty similar, offering around one Airmile for every £1 spent, but the BA Amex Platinum is the current best buy offering 1.5 points for almost every £1 spent and double points on BA spending. It does have horrendous APR though at 32.8 per cent and a £120 annual fee.
You can also choose to pay for flights using part Airmiles and part cash if you haven’t earned enough for a full flight. Keep an eye out for special offers too, such as a free passenger or double points - which would double your savings.
How can I make them work for me?
If you really want to get the most out of a reward card then the best way is to use it like a debit card - but you have to be very disciplined to do this. You use it to pay all your bills, including your mortgage and then pay it all off by direct debit each month, thus reaping all the rewards without paying any interest.
Obviously, banks and credit cards are there to make money for shareholders - not for you. So if you think that you won’t be able to resist running up large bills without paying interest, then you shouldn’t consider using your card in this way.
If you’re slack with your finances, but already use a credit card anyway - on which you often end up paying interest at the end of the month, then you should consider a zero per cent interest balance transfer or low APR credit card instead.
The tables below show how the current best buy cashback and points cards compare against each other and against Airmiles.
£5,000 annual spend
£10,000 annual spend
£20,000 annual spend
BA Amex Platinum Airmiles card
Airmiles earned
7,500
15,000
30,000
Destination
Not enough for a flight
Return flight to Spain, Italy or Germany
Return flight to Turkey, Russia or Libya
Worth
£0
Between approximately £100 - £180 with British Airways
Between approximately £180 - £400 with British Airways
Capital One Cashback card
Cashback earned in 1st Year
£88
£175
£350
Cashback earned in 2nd Year
£50
£100
£200
Tesco Clubcard credit card
Points earned
6,250
12,500
25,000
Money off at Tesco
£63
£125
£250
Nectar Points credit card
Nectar points earned
10,000
20,000
40,000
Money off at Sainsbury’s
£50
£100
£200
Which one is best for me?
From the table, you can see that in actual monetary terms, the right cashback card is the most lucrative. It is also the most flexible as it allows you to spend your reward on whatever you want.
However, some people still prefer to use an Airmiles card as they know that they will definitely end up treating themselves to a holiday - or at least a city break - as they won’t be able to use their points for anything else.
Along that same line of thinking, Tesco Clubcards and Sainsbury’s Nectar points have grown in popularity because they allow people to save on their everyday essentials, guaranteeing that they won’t squander their reward.
What to look out for
While these cards really are great for some people, they do carry some disadvantages that should be kept in mind along with some general good-to-know credit card rules that apply across the board:
Beware that many reward credit cards can have high APR rates so if you do end up paying interest at the end of the month it’s likely to be a lot.
You should be careful about how you use your card too. Cash advances and things like online gambling, where money is taken instantly from your account are classed as “instant cash transactions” and interest starts to add up as soon as it goes through, so you will end up paying interest even if you pay the full balance off each month.
Transfer fees. Although many cards also offer interest-free periods on balance transfers, these are almost entirely subject to a fee as a result of the “rate tarts” who continually switched cards in order to avoid paying off their debts. This charge varies from a set fee of around £50 - which you would be lucky to find today - to a percentage of the transfer, typically between two and three per cent. To transfer £7,000 at three per cent would cost you £210 so do take this into account. Also watch out for annual fees. Most cards don’t charge them any more but its good practice to check.
The use of the term “points” with loyalty and Airmiles cards is misleading for customers as companies then don’t have to advertise the actual monetary value of a point, and some are worth very little. Alternatively, with a cashback card you know exactly how much you get, in real terms.
Loyalty cards are also rigid. The whole point of a loyalty card is to encourage you to spend your money in a particular way. Many such cards give you more points per £1 if you spend in their stores, encouraging you to spend your money with them. Also, if you have points that are only redeemable in their stores, or with their affiliates then you will invariably end up spending more money there too.
Remember
Loyalty cards and reward schemes are only worthwhile if you never, ever pay interest. This is worth emphasising because as soon as you do start paying interest, the interest will immediately overshadow any benefits that you might get from your card.
So you have to be disciplined to make these cards work for you.
If you’re not able to do this, or already have debts that you’re paying interest on, then you need to look for a low APR or balance transfer rather than a loyalty scheme. Use our Credit Card Comparison Calculator to find a suitable credit card, or read our article on finding a Low-rate Loan, which could also help.
