Are Reward Cards Great For Everybody?

Credit card reward programs permit card users to earn reward points every time they make purchases with their card. A number of special offers award points upon the activation of a card often with additional points available on select purchases. These reward points can later be redeemed for various items, including discounts and gifts.  For example, the frequent flier program, which is a favourite of many Australians, allows cardholders to exchange points for free flights, flight discounts, car rental and even sightseeing events or entertainment.

On paper, reward points and programs sound great, although this may not be the case for everyone.  Firstly, lenders must make their money so they will not be giving any awards away for free. Credit card companies charge merchants a fee, which is usually 1% – 2% of the cost of the transaction. Speculation in the industry suggests that this fee goes directly to the cost of reward programs.

Furthermore, by offering credit card holders a reward program, card users are encouraged to swipe their card more frequently and with increased purchases it becomes impractical for the average card users to pay the entire balance each month, therefore customers are left paying a high interest rate each period. This provides the excess income for lenders to recoup funds which have been lost in reward program expenses. Furthermore, lenders charge higher annual fees with reward program credit cards.

Put simple, credit card reward programmes encourage consumers to overspend.

Some credit card customers should avoid reward program credit cards, because they will overspend in the hope of accruing enough points to redeem a specific reward and consequently a mountain of debt may also accumulate.  These customers are likely to be overwhelmed as interest on the debt accrues.  If credit card users were to calculate the amount spent on interest payments and even the annual fees, they will discover they have overpaid for the specific reward.

Reward credit cards are typically suitable for high income individuals; consumers who have high transaction volumes and can afford to pay their account off each month. By doing so, these card holders will avoid interest payments and will only be responsible for annual fees. These users will also be able to earn great rewards, such as free flights, quite quickly.  Though reward points are appealing, they are not ideal for everybody, especially shoppers who rarely use their credit card or who are generally low transaction shoppers.