Guide to cashback and reward credit cards
When you're shopping, do you usually tell the store assistant to 'keep the change'? It sounds like a weird idea, but there's a good chance you're doing something very similar if you don't get cashback or rewards from your credit card spend.
Why? Well, it costs merchants (places that take payment cards) to accept credit card payments. For every card transaction, the merchant pays something called 'interchange', a fee (which originated in the days of manual processing) charged for processing card payments. Of course, today, banks no-longer require teams of people to process payments physically; processing is automated, but interchange remains, and merchants build payment card charges into their overall pricing strategy.
Many banks now use the fees that interchange generates to attract customers and reward them for using their cards. Cashback and reward credit cards offer you an opportunity to get some of these charges back, in the form of points or cash.
Cashback and Reward cards vary a great deal regarding what they offer, the rates they offer, where you have to shop to earn points or cashback, and what you can redeem points for, and if used badly they can encourage unnecessary spending. However, used sensibly and by following a few golden rules, they can be a useful and rewarding addition to your wallet or purse.
There are many different types of rewards credit cards including supermarket or department store loyalty cards, branded discount cards, airmile cards, and cashback cards to name but a few. With so many to choose from, where do you start?
Before applying for any reward card, it is important to research and fully understand your spending habits, both now and what they are likely to be in the future. If, for example, you tend to use the majority of your card spend in a supermarket, either in the store or in their petrol station (or both), it may be that a particular supermarket loyalty card would be best for you. Conversely, if a high proportion of your credit card spend is on flights or you regularly travel internationally, then perhaps an airmile card is better suited. If you prefer to be more spontaneous with your credit card, spending at many different shops, then a cashback card might offer the best generic reward.
Once you have identified the type of card you are likely to gain the most benefit from, it is important to consider what particulars the cards offer, whether it is of interest to you, and what rate, and, therefore, reward you will get for your spending.
Finally, it is important to consider if there is any cost associated with the card (like annual or monthly fees), as these must be considered in any evaluation. It can be the case that significant fees could outweigh any rewards you may receive, or conversely, that enhanced rewards offered may be worth the annual fee charged because your ongoing spend warrants it.
Different credit cards have different reward schemes, but the points-based rewards, such as the Tesco Clubcard, or the Sainsbury’s Nectar card are one of the more popular types.
Every time money is spent on the card, points are earned. These points can then be used either simply as money off your next shop or can be redeemed for other discounted offers or deals.
When choosing a reward card, it is important to consider the number of points earned per £1 spent, so for example, card A might earn one point per £1, whereas card B could offer two points per £1 spent. Different card issuers place different ‘weightings’ (values) on their points, so a spend on a supermarket shop may yield a particular rate, while spending at their petrol station may yield another, and shopping outside of the store may deliver another amount altogether. To further complicate matters, the cash redeemable value of the points can vary dramatically from issuer to issuer, which is important if you want to use the cash value of the points against a further purchase.
With so many variables at play, it is important to consider what you want to use the points for.
If you want to simply get a discount off your next supermarket shop, you should find out what the cash redeemable value is of the points you are considering. Going back to card A, which earned a single point per £1, if each point carries a 1p value, you will have to spend £100 to earn £1 back in rewards. Initially, card B seemed like it was offering the better deal, with two points for every £1. However, if that particular rewards scheme values its points at 0.1p each, it means that cardholders spending £100 will only earn 40 pence. For this reason, double checking how much the points are actually worth is very beneficial in the long run.
If, however, you plan to treat yourself and redeem your points for discounted goods or days/nights out or even holidays, you should check how many hard earned points you would have to spend in order to redeem it for something you would like. So for example, a weekend away with one credit card issuer could cost 2000 points, while another issuer could offer a quadrupling of your points for the same deal so that only 500 points need to be redeemed.
In brief then, to ensure that you get the right reward card, you need to work out what you are going to get with your points, and how much you are going to have to spend in order to achieve your goal.
Some reward credit cards simply offer cash rewards for spending on the card, with the money often being credited to your statement. Comparing cashback cards tends to be easier than understanding the unending complexity of loyalty cards, because the higher the rate of cashback, the more money will be earned.
Life is never that simple though, and there are still some things to consider before you simply apply for the card offering the highest cashback deal.
Some cashback credit card issuers offer tantalising introductory bonus rates, some as high as 5%, to attract new customers, but these rates tend to only last for a limited period. After that most cardholders only earn disappointing low ongoing cashback. Of course, this is not always bad news - if you plan to make a large purchase with a cashback card and pay off the balance at the end of the following month, then you'll draw the maximum benefit from your card.
Another consideration is that some cashback cards do not simply offer flat cashback rates, but rates differ depending on much is being spent and where you are spending. For example, card C could offer 2% cashback in the supermarket, 1% on supermarket fuel and 0.5% elsewhere. This is particularly common for branded credit cards, e.g. the Sainsbury's Credit Card or Tesco Clubcard. Other cards may even offer the same rate wherever the purchase is made, but offer a better rate on large value transactions, or other products that they offer (insurances, bank accounts, clothing etc.).
Finally, some, but not all cashback card issuers place a cap on the amount of cashback that can be earned within a given period.
Therefore, to get the best cashback card, you need to work out how much cashback you are going to earn, based on your past spending and future plans, and whether you are going to need this card to work for you in the long or short term. Finally, you will need to know that the amount you receive in cashback will not exceed any cap that is in place.
Airmile credit cards are simply another form of reward scheme, like cashback and points-based cards, but instead of cash or points, the cardholder earns airmiles as they spend on their card. These airmiles, in turn, can be redeemed for discounted goods or services, flights, upgrades, companion reward flights, car rental, hotel rooms, travel insurance, or access to executive clubs and lounges etc.
There are many airline credit cards to choose from, but the most popular and well-established schemes to look out for are ‘Avios’ by British Airways, ‘Flying Club Miles’ by Virgin, and ‘Spend & Fly’ by Flybe. As with the reward points and cashback cards, it is important to check how many miles are earned per £1 spent and how many miles are needed to get free flights or other rewards that interest you.
It may seem like an obvious statement to make to say that consumers who are frequent flyers will undoubtedly benefit from free airmiles, as they will feel the benefit of their rewards often, but as with all cards, there are always more considerations than this.
It is always advisable to read the small print on any credit card application form, but this is particularly the case with airmile reward cards. Not because such credit card issuers are trying to catch you out, but more because the rewards they offer may not be as lucrative as you first thought or require some careful planning. For example, many of the flights offered as a reward are often exclusive of taxes and charges. Furthermore, the airmiles also expire, therefore it is essential that cardholders check the life span of any airmiles they accrue and ensure that they redeem them all within this timescale.
In more general terms, most airmile cards have a higher APR than traditional credit cards, and this should be considered especially if you are planning to pay off your balance over a period of time, rather than clearing it at the end of every month.
Furthermore, with the more ‘premium’ airmile cards, which offer enhanced point-earning opportunities and benefits, there is often an annual fee, and this should be taken into account when working out whether an airmile card is right for your circumstances, and balanced against any potential rewards you may receive.
Finally, most airmile credit cards offer very tempting bonuses for high spending in the first few months of card membership (and more often than not, the more tempting the bonus, the higher the APR). So, while consumers making major purchases and paying their balance in full can benefit enormously from such a cards, consumers who have no plans for large purchases, and those who pay off their balance over an extended period, will find themselves with an expensive card which offers little to no benefit.
To get the best airmile card, you need to work out what you're likely to spend, how you'll use the card and for how long and weigh this against any annual fees, increased APRs, and the rewards the card offers in the short and long term.
Getting more from your reward card
Reward credit cards can appear complicated when viewed collectively, but once you have selected a particular type, and further narrowed it down to one, the way forward is made relatively simple by the card issuers, who often have a well-trodden infrastructure in place to make redeeming rewards, points and cashback painless. Now it is time to make your card work for you in the best possible way, so here are a few handy tips and hints to help you on your way:
It has already been said, but always read the small print with any reward scheme, not only to ensure that you are getting the right sort of card for you, but also so that you are aware, and can take advantage of, absolutely everything the card has to offer. Furthermore, be sure to check everywhere you can gain points on your card, as it is often the case that spending in seemingly disparate places can earn you points (for example, you can earn Clubcard points at Esso garages, and Sainsbury’s Nectar points at BP garages).
With supermarket cards, regularly check out their range of opportunities to double up or even quadruple your points, rather than rush to use up your points the minute you get them simply on money off your next shop. It may be the case that they are offering something that you would have been willing to pay for anyway (for example, doubling or quadrupling your points to spend on clothing, nights out or even holidays).
If your personal circumstances change, for example, you move house and no longer live within an easy distance of your old supermarket, or you move jobs and don't need an airmiles card, don’t be tempted to keep your card. If you'll no longer benefit from your rewards, especially if your card charges a fee, switch. There are many alternative products to choose from, and changing credit cards has never been easier.
Easier said than done, but try to pay off your card balance in full every month. That way you can keep all the rewards you worked so hard for, rather than having them swallowed up by interest payments.
And finally, don’t be tempted to overspend on your credit card, simply to gain rewards. Unless you can be sure that you can pay off the balance, it is never worth it.