Credit card Guides

Loyalty vs cashback cards

By Emma Lunn editorial@consumerchoices.co.uk

We look at the pros and cons of loyalty and cashback credit cards and help you decide which is best for you…(Updated 4/12/09)

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% 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.

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• What are loyalty credit cards?
• What are the benefits?
• What are the disadvantages?
• So are cashback cards better?
• Remember

What are loyalty credit cards?

They work in the same way as other reward credit cards such as Airmiles credit cards, in that the more you spend, the more points you earn. They vary by how much you can earn, where and how you can spend your points and how this works out into real monetary value.

As their 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. For example, spending on the BT Credit Card will save you money on your BT bill – so it’s only worth going for if you have a BT phone line.

Other loyalty cards include MBNA Platinum Rewards Visa, SonyCard Mastercard/Visa, and the Nectar Credit Card.

What are the benefits?

• As with any reward card, the more you spend, the more points and discounts you will earn. Do not however, use this as an excuse to buy loads of stuff that you don’t need. The best way to make this work is to use your credit card like a debit card. Use it to pay all your bills, including your mortgage and then pay it all off by direct debit each month.
• Free stuff and money off. The more points you earn, the more you can do with them. When choosing your card, think about where you’ll be able to spend your loyalty points. The MG card for instance isn’t great if you’re not an MG lover, but if you’re a Sky customer and get the Sky card you can earn money off your bills. This works out as money in your pocket rather than points you might be spending on things you don’t really need. On the other hand, cashback cards give you actual money which, obviously, can be spent anywhere.
• Discounts. Some cards also give you money off at partner stores, and if you can work it out so that you redeem your points on things that you would be buying anyway, like grocery shopping, your bank could end up buying you dinner a few nights a week.

What are the disadvantages?

• “Points” - The use of the term “points” 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. Again, with a cashback card you know exactly how much you get, in real terms.
• They are rigid - The whole point of a loyalty card is to encourage you to spend your money in a particular way. Many cards, like the Marks & Spencer and the John Lewis/Waitrose cards give you twice as many 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.
• How you spend - 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 you make a transaction so you will end up paying interest even if you pay the balance off each month.
• Transfer fees - Although many of the cards offer interest-free periods, 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, to a percentage of the transfer, typically around 3%. To transfer £7,000 at this rate would cost you £210.
• Fees - Most cards don’t apply an annual fee any more, but you should double check as this could influence which card you go for.

So are cashback cards better?

You should definitely look into cashback cards before you sign up for any other type of loyalty card or reward scheme. These cards, such as some Amex (American Express) and Egg cards, typically give you a return of between 0.5% and 3% each year in cold, hard, cash.

This means that you don’t have to spend it where your credit provider says, and you’ll even get change.

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Otherwise, the best kinds of loyalty cards are the ones where your points are redeemable on things you would be buying anyway. For example, the Sky card gives you £1.26, per £100 spent, off your Sky bill. With the AA credit card you can redeem your points on AA membership and insurance.

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, this cost 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 rather than a loyalty scheme. Use our calculator to find a suitable credit card, or read our article on finding a low-rate loan, which could also help.

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