Reward schemes

The true cost of rewards

Reward schemes sound great on paper: you can earn a 'gift' simply by spending money on your credit card. But the truth is these schemes can change without notice and can sometimes cost you more than the reward is worth.

How reward schemes work

Cards with a reward scheme give you points for every dollar you spend on your card. Afterwards, you can redeem your reward points for goods or airline flights. These cards tend to have higher interest rates and fees.

Frequent flyer, loyalty and reward programs are great if you use your card a lot - but only if you pay the balance off in full within the interest-free period.

If you carry over a significant balance on your account from month to month, you'll lose more in interest charges and higher fees than you gain in rewards. If this sounds like you, switch to a basic card with a lower interest rate. Find out more about credit card balance transfers.

You should try to keep up with any changes to the terms and conditions of your reward scheme as they can change without notice, potentially leaving you with fewer rewards for the same cost.

Airline rewards travel money cards

Some airlines offer their frequent flyers the ability to opt-in to a prepaid travel money card linked to their frequent flyer account.

These cards can be a convenient way of keeping your travel money in one place and earning frequent flyer points, but make sure you understand all the costs involved and don't end up spending more on your holiday than you planned. Find out more about prepaid travel cards.

Should you sign up for a rewards scheme?

When looking at rewards schemes, ask yourself:

  • Will you use your card enough to qualify for the rewards?
  • Will you have to make extra purchases you don't need, to earn the rewards?
  • Will the program discourage you from shopping around for the best priced goods and services?
  • Will you be charged a fee to redeem reward points?
  • Will you have to redeem reward points within a certain time?

Case study: Sally calculates the cost of her reward

Young woman reading up about a credit card rewards schemeSally is wondering whether she should join a rewards program offered by her credit card company. She will earn one reward point for every dollar she spends and can redeem her points for flights, gift cards, movie tickets and other goods.

Sally decides to work out how much she has to spend to earn rewards. For example, to earn two adult movie tickets, she has to spend $4300. These tickets would only cost her $35 if she bought them at the movies. Since Sally doesn't use her credit card very often, she decides it is not worth joining the rewards program. It would take her a long time to earn the reward points and she would end up spending way more than the reward was worth.

Don't be taken in by the promise of a 'free' reward. You are paying for it with higher interest rates and fees.

Related links

Last updated: 31 Jan 2019