Credit Card Rewards Programs – making your loyalty pay

Credit card loyalty schemes and rewards programs have become increasingly popular with banks and credit unions because they provide extra incentive to choose one brand over another. But do loyalty schemes actually provide real benefits to you as a customer? The short answer: sometimes.

What are credit card loyalty schemes and how do they work?

Most credit card loyalty schemes work by giving you ‘points’ for each dollar you spend on your credit card and which can then be redeemed for travel and accommodation, gifts, electronic equipment and just about any other product and/or service you can think of.
Each scheme has a set number of ‘points’ that must be attained before you can take advantage of redeeming. Each scheme also has a set timeframe on points – hence points will expire after a certain period if they are not redeemed.

Should a loyalty scheme influence my choice of credit card?

It depends.
In most circumstances, if you make large and/or frequent purchases, then a loyalty scheme is a great way of extracting extra bang for your buck. Most loyalty schemes don’t cost anything to be a part of, although they generally have a higher interest rates applied to the card as a way of recouping costs. If you pay your bill in full each month this won’t be a problem, so why not take advantage of free rewards?
However, if you don’t pay your credit card balance each month then you’re better off choosing a credit card with low interest rates. Also, if you rarely use your credit card you might not be able to accumulate sufficient points in the required timeframe to take advantage of the rewards on offer. Don’t get drawn in by the bells and whistles if, realistically, you won’t spend enough to take advantage of them.

What benefits are on offer?

Benefits are dependent on the loyalty scheme you choose, however they can include:

free flights;
free accommodation;
electronic equipment – iPODS, sound systems, plasma screen televisions;
if you are a member of QANTAS frequent flyers, you may be able to use your points to redeem free or significantly reduced priced flights;
retail vouchers to major department stores;
magazine subscriptions;
selected merchandise; and
passes to major theme parks.

Is there anything I should watch out for when choosing a scheme?

Most definitely. Remember that, ultimately, loyalty schemes are a marketing exercise where you may or may not get all the benefits promised. Here are some caveats to be aware of:

What is the true value of the rewards? A free flight sounds great but what about all your other costs – accommodation, house/pet/child sitting, spending money, car rentals, insurance etc. You’re ‘free’ trip might not end up being so free after all.
Don’t be tempted to spend more than you would normally, just to get a reward. Research suggests that, as consumers approach a points level where redemption is possible, their spending habits peak sharply. Don’t get drawn into the trap of spending more just for a free iPOD.
Remember that you are still incurring debt every time you spend on your credit card. The usual precautions apply to spend wisely and ensure that you are able to meet your financial obligations. Remember, the bank does expect to be paid back.