A guide to Credit Cards

CHOOSING THE RIGHT REWARD CARD

Everyone likes a free prize, whether it’s getting something for nothing, or getting that special treat from money spent. However, claiming such a prize can at times be difficult. Many credit card reward packages guarantee their customers a bite out of the carrot that is dangled in front of them, whereas other credit card reward schemes just leave you feeling hungry. However, you’re not a donkey, but a human, and if you choose the right card you could make over £450 a year.

MAKING SENSE OF REWARD SCHEMES

Reward credit cards work on the basis of you spending on that card and then you being rewarded.

Spending can either be in a cash rebate or points, which are in turn used to redeem gifts, flights, trips or holidays.

Reward schemes are designed to encourage the average consumer to spend, spend, spend, in view that the more you spend, the more points you mount up. The profits come from charging interest and charging retailers around 1% of each transaction.

Other credit card transactions, such as balance transfers (moving debt from other cards) generally do not generate points.

WHEN TO REWARD YOURSELF WITH A REWARD CARD

There is one general rule of thumb when looking at a reward card – only pick a card for rewards if you are never charged interest. This means you must pay the card off in full every month.

The best way to follow this rule is by setting up a direct debit, because the amount taken from your account doesn’t have to be fixed and it can pay the card off in full every month. Funnily enough, some credit card providers miss this option off their DD forms, in which case you are entitled to write ‘pay in full’ and send it in, they should respect this.

However, if you do fail this golden rule and the interest cost significantly shadows the rewards earned, then you are better off choosing a card that minimises the interest rather than maximises rewards.

David Black at analyst said: “If you don’t repay your entire balance every month you should really concentrate on choosing a card with a low interest rate instead of one offering rewards.”

TYPES OF REWARDS

Anyone who shops a lot would do well with this card – but this doesn’t mean that you should over spend or buy without worry.

Credit card reward schemes allow travel and air mile rewards, but the value of air miles differs from scheme to scheme and by destination and time of travel.

Shopping rewards/point schemes are also another bonus to this type of card. Typical schemes are Nectar points, Tesco clubcard points and GM points. The value of accumulated points varies between schemes and according to the item or discount sought.

Loyalty points –Store points can be used in certain shops, or online stores, or redeem for free items.

Cash back is another reward process. Most cash backs are calculated in the region of 0.5% to 1.00% of card spend. Many cash back schemes are graduated and often have a maximum spend limit.

WHO IS THE BEST FOR A REWARD CARD?

If balance is your thing – then a reward card is not right for you. Any benefit you get from a rebate card is swamped by the added interest costs when you carry a balance. Instead, you should look for the lowest-rate card you can find so you can pay off your debt as quickly as possible.

Patience is a virtue - Reward cards are best suited for those who are willing to invest a little time. Savvy rebate card users view their packages as an investment type, and know the payoff can vary with the amount of attention they give. Focusing on spending patterns allows you the maximum rebate.

Failing to plan is planning to fail – Those who plan are also better suited to this type of card. Whatever the scheme, you should carefully pick what you redeem points on. For example, Nectar offers 1500 points for £7.50 in Sainsbury’s but £10.00 in Dolland & Aitchison. The rankings are based on average redemptions, but pick carefully and many reward schemes pay much better.

Those with a bad credit score may find it more difficult to be accepted for this type of card.

REMEMBER THE SMALL PRINT

If you are looking to apply for a reward credit card to earn points or rewards when you spend, you should bear in mind that the terms and conditions as well as the rewards can vary. You can compare the range of reward credit cards easily online.

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