@chooseonline
Newsletter
More

Purchases mean prizes with reward credit cards.

The value of those prizes is often, however, somewhat murky. But don't let that put you off.

This guide aims to make the whole process - from how the cards work to how the most savvy users play the system - much clearer.

The best reward credit cards

Let's start off with some of the best deals.

In general, airmiles credit cards tend to offer the most valuable points, expressed as the worth of each pound spent in redeemed rewards.

Among non-air miles offers the American Express Platinum credit card is currently offering one of the best cash back rewards schemes: a standard unlimited rate on all spending (1.25%), plus four times the usual earning rate in the first three months (5%, up to £100) and then double the usual rate (2.5%) for a month on every card anniversary (the latter offer has a preceding year spending requirement).

American Express Platinum credit card
	Cash back 5% for 3 months (up to £100 cash back), then 1.25% unlimited on all purchases, plus a yearly bonus offer	Apply here »
Representative Example: 14% p.a. variable on purchases. This is equivalent to 18.5% APR representative variable based on a credit limit of £1,200 and including a £25 annual fee. American Express Services Europe Limited, Belgrave House, 76 Buckingham Palace Road, London, SW1W 9AX.

Even the top deals aren't universally rewarding, however. Finding a card that suits current spending is always the ideal: use our rewards credit cards tool for an illustrative search based on average monthly spend.

What are credit card rewards worth?

Credit card providers go to a lot of effort to disguise the 'real' worth of rewards to make it look as if you're getting more, just as supermarkets love to advertise a 'was' price that the product never has been, or not for long.

Methods vary for working out the 'real' value but one popular way is working out the number of points you need for £1 of the end reward.

So, for example, if it takes 8,000 points to get a £40 gift voucher, then you need 200 points for each £1 of real rewards.

So if, in the example above, £1 of card purchases earns two points, each £1 must be worth 0.01p.

Examples like this are of interest but little practical use, however, since reward credit cards are rarely so simple as gift cards. Most points are now redeemable against a variety of rewards and in the case of air miles, for example, the cost of the end reward is itself hardly clear.

Keeping rewards useful

People that don't use reward credit cards usually dismiss them by saying something along the lines of: there's no such thing as a free lunch.

They've got a good case. Reward credit cards are the archetypal 'free lunch', attempting to change consumer behaviour for their own gain and not always responsibly.

However, their gain isn't necessarily consumers' loss.

How reward credit card providers make money

Reward credit card providers make money in three ways.

First, and least disruptively for cardholders, they simply take money from the retailers where you spend.

All card providers take a 0.5 - 1% fee from the merchant so it's worth their while to encourage you to use their card, rather than a competitor's or cash, for as much spending as possible.

Second, reward credit card providers bank on some of their cardholders paying interest either by not paying off the purchases balance in full or by using the card to make a cash advance transaction. More on this in the next section.

Finally, many reward credit cards are also loyalty cards.

It's cost-effective for, say, British Airways, to offer rewards because they're getting loyal customers in return.

Even Mastercard do something similar with their World Mastercard.

So, it's a free lunch, yes: there are strings attached. But we think they're strings we can live with.

Sticking to the rules

If you regularly use your credit card but always clear the balance in full each month, a reward credit card could be giving you something back in return for that good behaviour.

Let just say that again:

Rule #1: reward credit cards are only rewarding when the balance is ALWAYS paid back in full.

This is the most important rule of reward credit cards and is best achieved not only by keeping a close eye on credit card statements but by setting up a direct debit to make sure the payment is made each month.

It sits alongside the second rule.

Rule #2: do as much of your spending as possible on the reward card to get as many points as possible.

Now a note on mis-reading: rule two doesn't mean 'spend as much as possible' it just means moving your normal spending, or as much of your normal spending as you can repay in full at the end of the month, to the rewards credit card.

Any other tip for maximising reward earnings is secondary to those two rules: follow just those two and you shouldn't go too far wrong with these credit cards.

Main types of rewards

Now that we've talked a bit about how reward credit cards work it's time to think about some of the specific rewards available.

In most people's minds these rewards come down to two things: rewards and cash back.

Cash back is an attractive, fuss-free reward: you know exactly what you're getting.

But the truth is that reward cards are likely to earn more in real terms than cash back ever will because their deals are built on loyalty with retailers or service providers rather than just loyalty to the credit card provider.

See our full guide to cash back credit cards here.

As we noted above, we like rewards other than cash back because they're usually paid in a more solid form - shopping vouchers, say - so you can't spend them 'accidentally' as you can with cash back credited back to the card.

Rewards feel more valuable and are, therefore, likely to be used more wisely.

Airmiles

Generally, the best of the credit cards rewards, in terms of the value per spend, are airmiles.

They're one of the easiest ways to turn spending into real rewards for three reasons. First, because so many have introductory bonuses that'll get you in the air within months.

Second because, in general, air miles are worth much more than other rewards.

And, third, because in the long term these cards make loyalty pay.

Those who always fly with a particular airline will pick up more miles on their flights, get VIP treatment and pick up extra travel offers.

It is fairly common however for the cards that offer the most air miles and additional benefits to charge annual fees.

That means they're offering the best credit card rewards only to higher spenders so make sure you check whether that applies to you before making an application.

To see more information on this type of reward click through to our full air miles credit card guide.

Note, though, that while air miles are some of the best credit card rewards the same can't be said of 90% of the travel rewards on offer.

Many credit card providers promise 'travel discounts' on package deals but, in most cases, even with the discount the deals are pricey.

Others promise travel accident insurance on trips, an extra that hardly ever pays out and is no replacement for full travel insurance.

There are some exceptions but, largely, they're credit cards made for the seriously well-heeled where other rewards, in return for very high spending, far outweigh the benefits.

One premium credit card like this, for example, used to offer enough bonus points in the first three months for a three night stay in a standard room at the Sheraton Sharm El Sheikh Hotel.

Retail rewards

As we mentioned previously, retail or shopping rewards credit cards can also be one of the most valuable forms of card rewards.

As with air miles, that's partially because there's a loyalty aspect in terms of the companies involved. This is even true of very general retail reward credit cards, which offer more points in certain types of shops such as supermarkets and pay bonuses in shopping vouchers, because its in the interests of the shopping voucher companies.

Note, too, that retail doesn't have to mean the temptation to splash out more in the supermarket or the shoe shop. Some credit cards save on bills or on petrol, for example.

Charity credit cards

Finally, a word, or rather a warning, on charity credit cards.

These reward credit cards have an immediate appeal: they're an affordable way to give and a smug one, since it's the provider's shelling out.

That's the problem, though: providers aren't willing to shell out much.

You can read more about this in our cash back vs charity guide but, in brief, the rates are much less.

Collecting from the credit card provider with a normal cash back credit card and then just siphoning the money off to your charity of choice would raise a lot more money, especially considering you could add Gift Aid this way, which we're not sure is the case with charity credit cards.

Comments