What Are Rewards Credit Cards?

When used responsibly, a rewards credit card provides consumers with a financial benefit simply by using it for everyday spending. Points are accumulated for every dollar spent and the card user is entitled to trade these points for perks like cashback, points or miles.

“Rewards credit cards are an exceptional financial tool if they are used correctly,” says the CEO of consumer advocacy organisation Get My Refund, Carly Woods.

Rewards cards come with annual fees and high interest rates, so it is easy to fall into the trap of paying more in interest and fees than the value of accrued points.

Be strategic in how you approach your rewards credit card. If you only use it for a handful of purchases each month, the benefits will be negligible.

By using a rewards credit card to pay regular bills and expenses, such as groceries, as well as big ticket items like travel, the points will accumulate and substantial rewards will be available.

Credit card providers offer rewards programs as a way of cultivating customer loyalty, as it incentivises the customer to use the credit card for their day-to-day spending.

There are broadly four categories of rewards available through loyalty programs. The first are travel rewards, whereby the user accumulates points for every dollar spent that can go towards flights.  The second are known as  general rewards. These are provided by the major banks and the points can be redeemed for a wide variety of products and services, cashback, flights and hotels.

Supermarket rewards cards usually provide cashback incentives for shopping at either Coles or Woolworths and their affiliated retailers. That said, a Woolworths Rewards Card can be redeemed on groceries as well as Qantas flights. Coles’ loyalty program is known as Flybuys, while Woolworths offers Everyday Rewards. These are not credit cards, mind you, in the sense that these cards are used to record not make purchases, but are nevertheless generally grouped under the rewards category. Coles and Woolworths have separate credit cards, with annual fees, that are linked to their loyalty programs.

Finally, there are also store-specific rewards that are tied to a particular retailer, or group of retailers.

Not all expenses are eligible for the purposes of accruing points. Cash advances will never earn points, nor will paying an Australia Taxation Office or another government bill. Some card providers have excluded council rates. And sometimes an international transaction fee of around 1.25% may apply so always check the terms and conditions.

Set up your bills as a direct debit so that everything is paid from the rewards card. At the end of the month, the rewards card provider will issue an account statement detailing the points accrued.

The number of points varies according to the ‘earn rate’ and typically ranges from half a point per dollar for a consumer card up to about 1.5 points per dollar. Usually, the higher the earn rate, the higher the credit limit and the higher the annual fee. Most cards offer bonus points on sign-up to provide a one-off boost.

The benefits that become available depends on the type of rewards card. Accumulated points on a Qantas or Virgin rewards card can be converted to flights or accommodation at participating hotels, or to upgrade from economy to business class.

Setting a goal for what you will use your rewards points for can be helpful for tracking your progress each month.

When it comes to selecting the right rewards credit card for you, choose one that best suits your spending habits—some people prefer the simplicity of cashback, for example.

Woods strongly recommends reading the terms and conditions of any new card. These are usually accessed by clicking a link at the header of the confirmation email. 

“Familiarise yourself with the terms of the rewards program, because it will help you to maximise the value of your points with your specific card,” says Woods. “Nowadays, cards providers try hard to make the terms easy to understand by using plain English.”

You may use your card to receive:

• Cashback. Cashback is straightforward: you earn a percentage of cash back on every eligible purchase made with the credit card. It could be a flat rate, of say 3%, on all purchases. Some rewards programs offer variable cashback rates, with bonus categories of spending that change each month, and everyday purchases like groceries earning a lower cashback rate.
• Products. A general rewards card provides retail products that are participating in the rewards program, such as electronics. Before signing up, check to make sure that the items are relevant to your purchasing needs.
• Frequent Flyer points. A frequent flyer rewards card is tied to associated airlines and the rewards consist of free flights, upgrades and insurance. Some rewards cards enable miles to be transferred to travel partners such as hotels. As with points cards, the offer is typically a fixed number of miles for every dollar spent, although there may be certain purchase categories with a higher rate. There may also be bonus periods where you earn double points for dollars spent.
• Discounts in-store on products. Some rewards cards offer discounts on in-store purchases across all partner retailers. For example, points accumulated on a Coles Mastercard can be spent at Coles, Target, Kmart and Officeworks, among others.

The interest rates on rewards cards are usually high, which means that if the balance is not paid off in full at the end of the month, the interest accrued could be significant.

Interest rates are high at the moment despite the pause on interest rate increases, and an interest rate on a rewards credit card could be as high as 24%.

“Rewards credit cards are a fantastic credit facility if used correctly. They are beneficial to those who pay off the entire balance every single month,” says Woods.

“However, if you don’t have the capacity to do that, you can end up in a vicious cycle of needing another credit card to pay off the first credit card debt. This will have a detrimental effect on your mental health.”

If budgeting skills are still a work in progress, a better alternative would be a low interest credit card, a balance transfer, or sticking with a debit card only.

Rewards cards also usually have an annual credit card fee that could range from one hundred dollars to $2,000 or more. Cards with a higher fee offer extra rewards, like a concierge travel service.

If you don’t use the rewards card very often, you’ll often end up paying more in the credit card fee than you will in the benefit you get from it. Some rewards programs are restrictive, so it is worth checking the details of all the offers. For example, some rewards programs may exclude deals on airfares or flexible fares from the program.

While it is not a negative per se, be mindful that when booking flights using rewards points, there may be taxes that are not included in the program. Budget for a few hundred dollars to allow for this.

The best kind of rewards credit card are often the broadest type because there will be a variety of rewards to choose from.

An example of a generic card is the Qantas rewards card. It is available through all the major banks and the points are simply added to your actual Qantas account and can be spent however you wish.

The NAB Rewards Card offers a wide variety of rewards, including gift vouchers, air fares, charitable donations, AFL tickets and merchandise.