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A rewards card can help you earn flights, travel and more. But are they worth the extra cost compared to no-frills cards?
Credit cards provide a convenient way to make in-store and online purchases, both locally and internationally, using a flexible loan facility rather than your own money.
When you repay the closing balance (what you owe) in full each month, the loan will typically be interest free. If you repay over an extended period, you’ll generally be charged interest until the balance is repaid in full.
In addition to offering a convenient way to pay, credit cards often feature a rewards program, complimentary travel insurance, and various other benefits, making them an appealing option, depending on your needs.
Rewards programs are largely funded by merchants who pay a fee each time they accept a credit card payment. With higher merchant fees than Visa and Mastercard, American Express offers richer reward programs, however this comes at the expense of card acceptance and surcharging.
Today, most credit cards include both a physical card for your purse or wallet, and a digital card for your mobile device (e.g. Apple Pay, Google Pay).
Depending on the credit card you choose it will offer some, or all, of the following benefits:
Credit cards offer many benefits, however there can be some downsides:
No Annual Fee Credit Cards offer a no-frills option for fee conscious consumers. They can be a good choice for occasional or emergency use. An important trade-off to be aware of is that No Annual Fee Credit Cards typically have a high interest rate, so if you’re likely to pay interest from time to time, a Low Rate Credit Card may be a better choice.
In addition to No Annual Fee Credit Cards, some credit cards offer an ‘annual fee waiver’ when you satisfy a certain condition, for example spend $5,000 over 12 months. Others offer ‘no annual fee in the first year’ for new accounts.
Low Rate Credit Cards feature a low interest rate on purchases which can make them a good choice if you expect to pay interest from time to time. Some cards also feature a low interest rate on cash advances. Like most credit cards in the market, Low Rate Credit Cards usually enable you to avoid interest on purchases completely by repaying your closing balance in full each month.
Rewards Credit Cards are popular as they enable you to earn rewards, such gift cards, cash-back, merchandise or travel, on everyday spend. Rewards points, which are earned on most purchases, accumulate and can later be redeemed for a reward of your choice.
Credit card providers typically manage their own rewards program, therefore the value of a point can vary, making it difficult to compare products. Some Rewards Credit Cards allow you to convert your points to a different currency, for example Flybuys or Velocity Frequent Flyer points.
Rewards Credit Cards with higher annual fees generally enable you to earn points faster, and typically include features such as complimentary travel insurance.
Gift cards tend to be the most popular Rewards Credit Card redemption, and typically offer good value. However, if travel is your focus, then a Frequent Flyer Credit Card may be a better choice.
Rewards Credit Cards typically have a high interest rate, so they may not be the best option if you’re likely to pay interest from time to time.
Frequent Flyer Credit Cards are a type of Rewards Credit Card, allowing you to earn points directly in a specific airline loyalty program. Points can typically be redeemed for flights, flight upgrades, accommodation, and other travel expenses through the airline’s loyalty program. Some programs also allow you to redeem for retail gift cards and merchandise, however flights tend to offer better value.
The main frequent flyer programs in Australia are Qantas Frequent Flyer and Virgin’s Velocity Frequent Flyer program. Most banks have a credit card product linked to these programs, while a smaller group offer credit cards featuring programs, such as Singapore Airlines Krisflyer, and Emirates Skywards.
If you’re interested in Qantas Points, then you’ll have to commit to a credit card that only earns Qantas Points (known as a ‘direct earn’ credit card). However, if Velocity, Krisflyer or points in another airline program are of interest, then you can keep your options open by choosing a general Rewards Credit Card linked to these programs.
Like general Rewards Credit Cards, Frequent Flyer Credit Cards typically have a high interest rate, so they may not be the best option if you’re likely to pay interest from time to time.
While it’s almost impossible to find two credit cards identical in all aspects of price and features, credit cards that share the same ‘tier’ tend to have many similarities.
Classic, Gold, Platinum, and Black (or Signature), are the four main credit card tiers. As a general rule, Classic credit cards are no-frills products with a low annual fee, while Gold, Platinum and Black credit cards offer increasingly richer features for a higher annual fee. Higher tier credit cards also have higher minimum credit limits, meaning you’ll need a higher income to be approved.
Low Fee and Low Rate products tend to be Classic credit cards, however there’s a small number of Gold and Platinum options on the market that offer additional benefits, such as complimentary travel insurance.
Rewards and Frequent Flyer credit cards are offered in a range of tiers, with the higher tiered options featuring more generous points earn rates, and benefits such as complimentary travel insurance, and airport lounge passes.
With over 200 credit cards to choose from in the Australian market, there’s no one size fits all. When considering your many options, you should first think about how a product best suits your needs. For example, there is no point taking out a credit card that costs $300 per year in annual fees so that you can earn rewards points, if you are not going to earn enough points to cover the cost. Similarly, if you’re planning on travelling and never pay interest, there are various travel and rewards credit cards that may benefit you more than the no-frills options.
One of the most important considerations when choosing a credit card is whether or not you’ll repay the balance in full every month. If you plan to use your credit card to smooth your cash flow and occasionally help finance purchases, then a Low Rate Credit Card should be on your short list.
In short, consider how you will use the card, what you’re prepared to pay for it, and how well you know your spending habits and needs, both now and in the future.
Once you have a clear picture of how you will use your credit card, don’t limit your search to one or two banks – utilise a service like Stay or Go to look across the market. Different banks may offer special promotions on their cards from time to time, and some of these can be very rewarding. That said, it’s important to ensure the core features of the credit card you choose meet your needs, so be careful not to be overly influenced by introductory offers.
At Stay or Go, we assess products over a three-year period to help ensure the product you choose is a good, long-term fit.
A simple information source for how to improve your credit score can be found here on the Government Money Smart website. Maintaining a good credit score is important if you wish to borrow over time, for example, taking out a Home Loan.