Guide to reward credit cards
- Earn points or cashback as you spend that can be used in dedicated reward schemes, including shop loyalty cards, air miles and credit company offers
- If you don't pay off your balance in full every month then costs may well outweigh any rewards, and you also need to consider any annual fees
- You're likely to need a good credit rating to qualify, but a soft search will let you see your odds of qualifying
There's no easy way to say this, but here goes: shopping is just a little bit boring.
Yes, you'll get your goods and that's fine, but that's really all there is to it.
What if there was a way to make your shopping work harder and give you more than just what you've paid for?
This is what the reward credit card is for, so read on to find out how it works.
Best reward credit cards
Fancy jetting off somewhere exotic for next to nothing? Or maybe a free set of goodies you can't get anywhere else?
Well, you might just be able to if you have a reward credit card. How does it work? Well, you spend money, and you earn a reward. It's that simple.
Your reward could be in the form of cashback, or you might instead earn points to redeem in a reward scheme.
This might be an in-store loyalty scheme such as Tesco Clubcard or Nectar, which will be a great help towards future shopping expeditions - especially if you bank with Tesco or Sainsburys.
If you've a healthy sense of wanderlust, you might prefer to earn airline points, as these can be used to get money off flights.
Some credit card companies run their own unique schemes which offer a range of rewards, including travel discounts, shopping gift cards, and free gift experiences.
If you get the right card, you might even enjoy a mix of cashback and rewards.
Be careful though: some reward cards charge an annual fee. Tesco, for example, charges up to £150 for its credit cards.
Others offer introductory points bonuses if you spend a certain amount within a specified time period - for example, if you spend £2,000 in the first three months you have the card.
Either of these could prove more expensive than you might have initially expected.
Compare reward credit cards
The obvious major benefit of reward cards is that you can earn points to redeem on a range of things just by doing your everyday spending on the card.
The reward points can mount up over the course of a year, depending on how much you spend each month.
Also, unlike most cashback credit cards, with a reward credit card you usually earn points as you go, meaning you can spend as you earn instead of waiting until the end of the year.
Take heed: with reward cards, it's a case of use it or lose it. According to BusinessInsider, 31% of cardholders have failed to redeem their points in any way.†
Let this be a lesson: there's no point in having a reward credit card if you don't use the rewards. You might as well have a normal one.
You should also be very wary of spending more than you can afford just to earn more points, particularly if there's a juicy introductory points bonus on offer.
And you should definitely make sure you pay off your balance in full each month, otherwise the cost of interest repayments could very easily cancel out the value of any rewards you might earn.
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You should also be mindful of any annual fees and any date restrictions on when you can redeem your rewards. Otherwise you could find yourself unable to use those points you've carefully built up, whether or not you were intending to use them.
As for jetting off for next to nothing, you might find that the actual flight itself may be free, but you'll still have to pay the associated taxes and charges.
A reward credit card works in exactly the same way as a normal credit card, but with the bonus of rewards on top. The only real condition for having one is that you pay off your balance each month, or at least as much as you can afford to. Oh, and remember to claim your rewards!
So, as long as you're sensible with it, there are no major downsides to having one.
Well, there may be one downside: with a reward credit card you're restricted to spending your points only via the specific reward scheme your provider operates.
So, you're going to put most of your spending on a reward credit card, it might be worth considering a cashback credit card instead. With cashback, you can spend the money rewards you receive anywhere you like.
If you're just looking for extra spending money to enjoy a shopping spree, a cashback credit card may offer better value.
What credit cards do I qualify for?
Reward cards are quite an exclusive product, and tend only to be given to those customers with good credit histories. You may even to have a minimum household income threshold before you're offered one.
When looking for a card, you can use our smart search tool that allows you to make a 'soft search' for reward credit cards.
What's a soft search, you ask? Well, if you make inquiries into getting a credit card, this will show up on your credit history.
A soft search, however, will not impact on your credit history. Instead, you'll be shown the cards you're likely to qualify for before you get the chance to proceed with a formal application.
That way, you can make a more informed choice about which card to apply for.
Finding the right credit card
If you decide you want to go for a reward credit card, make sure you pick one that offers rewards you'll use. As mentioned, many rewards go to waste, so there's no point getting a card which offers points you won't use - you may as well stick with a normal credit card.
There's plenty of choice on offer: at the time of writing in September 2018, there were well over 50 such products listed on the matrix of independent financial researcher Defaqto.
Some were explicitly 'Reward Credit Cards' or 'Cashback Credit Cards', while others were credit cards offered by specific shops.
Shopping reward schemes are also an option for cardholders. These can often take the form of loyalty cards, which operate more as a means of building up points, but aren't necessarily connected to your actual bank account. The Nectar Card from Sainsbury's would be one example of this.
Says Matt Sanders, GoCompare's money expert, "Reward credit cards are a very good way of making your money work for you. By earning points or rewards as you spend, you're getting something nice even as you do something as mundane as grocery shopping.
But they shouldn't be treated like a free buffet. Find the right card for your circumstances, and make sure you don't overspend just for the sake of a reward. It's better to spend sensibly and claim the rewards you earn than get into debt that outweighs the value of your reward."
Reward credit cards and the Interchange fee
One aspect of credit card usage that isn't often brought to light is what happens behind the scenes.
We take our cards out at the till, pop it into the card machine, and (hopefully) the transaction is approved and away we go with our goods. But what happens in the small amount of time it takes for all that to occur?
There are several steps to a standard card transaction:
- The card machine in the shop contacts the shop's bank to approve the transaction
- The shop's bank contacts yours to approve it based on the amount of money in your account
- If there's enough money in your account, your bank approves the transaction and receives an 'interchange fee' for doing so
- The shop's bank receives the approval from your bank and approves the transaction for the shop
- You get your goods!
If everything works as it should with the various banks, this entire process is done and dusted before you can even be asked if you'd like a carrier bag (no, obviously, you have your own).
The shop is charged a fee for this by its bank, known as the 'Merchant Service Charge' (MSC).† Along with the MSC comes the Interchange Fee that the bank receives - the shop is charged twice, in effect.
Thanks to new regulation imposed by the EU in 2015, the Interchange Fee has been capped at a maximum of 0.3% for credit card transactions.
This ultimately means that your bank will receive less money from any given transaction.
There were fears that this would lead to customers who used a specific card, such as American Express, might be charged more by the retailers to boost their profit margins.
However, the full effects of the IFR on consumers won't be seen until 2019 when a report on the matter is presented to the European Commission.
In the meantime, thanks to a ban on surcharging (additional charges over and above the price, including VAT) imposed in January 2018, you may well be able to use your reward credit card to shop till you drop!