Australians are keen to get the best return on their money. Many of us are enticed by the incentives of reward credit cards offering cash back, frequent flyer miles or points that can be dedicated toward purchases. Coupled with good money management, a rewards credit card will pay dividends. However, in the hands of a whimsical spendthrift the card can become a further drain on financial resources.
How rewards credit cards work
Whenever a rewards credit card is used, the merchant passes on a fee to the bank. The fee is around 2% but will vary from bank to bank. This small percentage provides banks with the opportunity to reciprocate with customers. Instead of taking the full merchant fee, many banks return a percentage of the merchant fee to the consumer. This rebate accumulates as savings that can be used for points, cash or air miles.
In other words, the more you spend the more you earn. Banks offer additional incentives for card holders who pay their bills on time. Conversely, penalty fees often apply for late payments or defaults, negating any benefits of the card. It’s also worth investigating various reward credit cards according to your specific spending habits. Some cards focus on premium travel rewards air miles, while other cards are geared more toward points for purchasing targeted products.
Banks will do whatever it takes to attract customers. Our competitive banking market means that institutions are forever introducing new incentives to lure our business. Often, new rewards credit cards come with conditions and incentives to help jump-start your savings accumulation. For example, a bank might offer a huge bonus if you spend a certain amount during the first few months. Banks make money from both our savings and our spending, so anything that encourages the free-flow of well managed finances will appeal to banks.
As banks jostle to provide consumers with the best reward percentage, their own profit from the transaction dwindles. Some banks pass the full merchant fee back to the customer. In order to counteract potential losses, the banks add annual fees to the card. Credit card companies also know that many card holders don’t always pay their balance in full by the due date. Financial penalties or an increased interest rate could be applied with the end result of fines adding up to more than the value of any potential rewards.
Choosing a rewards credit card
With so many cards on the market, the choice can be complex and bewildering. Some cards offer flexibility in redeeming rewards, while others assist with achieving specific targets such as air miles, gift cards, hotel loyalty points, or cash back.
There will be a card that best fits your business or lifestyle. For example, if you are frequently flying for business or pleasure a travel rewards card will appeal. Take time to read all the card conditions, as your decision might also be swayed by the chance to earn hotel loyalty points alongside the air miles.
Cash back cards are often the best choice for people who don’t fly often. These cards are also great for those of us without the patience and determination to watch our money grow. Whether you are purchasing groceries, filling up the gas tank, or buying a gift, cash back cards give you the opportunity to see your card in action with every purchase. Sure, it’s only a dollar or two here and there, but free money is always welcome.
Some cards are designed with flexibility in mind. Rewards don’t always add up quickly and many customers are happy to let them slowly accumulate on the back burner. A flexible credit card allows the choice of travel points, cash back, merchandise and more.
It’s worth noting that not all merchants accept every type of credit card. Procuring a card that is accepted world-wide will go a long way toward maximising your rebate savings with every purchase. Without the capacity to complete a financial transaction, an obscure or unrecognised plastic card will do little but add further weight to an already overstuffed wallet.
Credit rewards cards aren’t for everyone. People on low incomes and those under tight financial strain could well do without the temptation of easy money that could lead to further hardship. Many customers prefer the simplicity of a debit card that still has credit card purchasing power, but utilises existent account finances.
We all want our money to work harder for us. People with good income and sound financial management are well poised to take full advantage of rewards credit cards.