Credit cards can commonly be associated with getting into debt, but when used correctly they can be a useful financial tool and allow for many benefits.
Reward and cash-back credit cards are designed to encourage cardholders to spend by offering additional incentives. The idea being that by offering something back every time a purchase is made, consumers will be more likely to continue spending. There are different types of rewards credit cards; some have points-based schemes, others are for air miles, but it's even possible to earn cash.
Due to the generous nature of reward credit cards there are some things to be aware of such as; consumers who spend more could be earning hundreds of pounds (or the equivalent in rewards) each year if they stick to the simple rules. The rewards on offer vary depending on the card, but the top deals on the market can earn as much as £3 per £100 spent.
Different credit cards have different reward schemes, but points-based rewards, such as the Tesco Clubcard, are one of the more popular types.
Every time money is spent on the card, points are earned. The number of points earned per £1 spent will also differ depending on the providers, so it's important that cardholders look for maximum points per pound to get the best rewards. For example, card A might earn one point per £1, whereas card B could offer four points per £1 spent.
It's not just the number of points earned per pound that needs to be considered when comparing reward credit cards. Consumers also need to be aware on how much the points are worth and what they can be used for.
Going back to card A, which earned a single point per £1. If each point carries a 1p value, UK shoppers will have to spend £100 to earn £1 back in rewards. Initially, card B seemed like it was offering the better deal, with four points for every £1. However, that particular rewards scheme values its points at 0.1p each. That means that cardholders spending £100 will only earn 40 pence. For this reason double checking how much the points are actually worth can be beneficial in the long run.
Some reward credit cards simply offer cash rewards for spending on the card, with the money often credited to the monthly statement. Comparing cash back credit cards tends to be slightly easier because the higher the rate of cash-back, the more money will be earned.
However, some card issuers do not just have a flat rate, they offer different amounts of cash back depending on the type of spending and how much is being spent. For example, card C could offer 3% cash back in the supermarket and 1% on fuel. This is particularly common for branded credit cards, e.g. the Sainsbury's Credit Card. Other cards may even offer the same rate wherever the purchase is made, but offer a better rate on large value transactions.
Watch out for introductory bonus rates when comparing cash-back credit cards as many have temporarily inflated rates of up to 5% on spending in the first three months, but thereafter cardholders could earn a measly 0.5%.
An airline credit card is another reward scheme, like cashback and points-based cards, but it earns air miles. Consumers that are frequent flyers will undoubtedly benefit from free air miles. The cards work in the same ways as the other reward cards; air miles or points are earned every time purchases are made using the card.
There are many airline credit cards, but the popular schemes to look out for are Avios by British Airways, Virgin, Flybe and Easyjet. As with the reward points, it is important to check how many miles are earned per £1 spent and how many miles are needed to get free flights.
Most air miles credit cards offer astronomical bonuses for high spending in the first few months, so consumers who are planning a major purchase, should consider using one of these cards.
Always read the small print; this is particularly important with air miles reward credit cards because the flights are often exclusive of taxes and charges. The air miles will also expire quickly; it is essential that cardholders redeem their miles as soon as possible.
The credit card issuers offer rewards for one reason only - to get cardholders to spend as much money as possible. Given the rewards on offer, it is advisable to use a budget.
However, rewards cards are not designed to give cardholders an unlimited amount of money. Instead, they should be used as an alternative payment method for all the usual expenses. When individuals pay for the weekly groceries, fuel, holidays, household bills and anything else, they should use their reward credit card.
The majority of credit cards offer an interest free period, of between 30 and 60 days. Provided that cardholders repay the balance of the card in full before their next statement, they will not be charged any interest.
Another common feature of any reward card is the annual fee. Some do not charge one, but they will be likely to have a higher rate of interest. For those that do, make certain that the rewards offered at least exceed the added expense.
It is essential that UK consumers pay back in full in order to avoid any unnecessary charges. With the average APR around 18-19%, the cost of interest can easily eradicate the value of any rewards earned, no matter how attractive.
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