What Is a Rewards Card, and is it Right For You?

24th January 2011

Almost everyone these days uses a credit card on practically a daily basis. What many people don't know is that there is a type of credit card that will reward you for doing so along the way. This type of credit card is appropriately known as a rewards card.

A rewards card gives you the opportunity to gain something from using your credit card. Different cards offer a variety of ways in which you can earn these rewards - by paying off bills, paying off the money you owe or simply by using your credit card in transactions. The best reward cards can give you up to £3 for every £100 you spend. This may not sound a lot, but if you use your credit card regularly you could earn hundreds of pounds a year in this way.

A whole host of rewards are offered by rewards cards. These typically include credit towards frequent flyer miles, discounts in particular store and certain cash rebates. Whilst shopping around, you should consider which rewards will benefit you - there is no point collecting flyer miles if you don't intend to travel abroad. But if you find a reward that will be very useful to you, seriously look into using the card.

The best way to choose a rewards card, after determining which rewards will benefit you most, is by comparing the charges on the various cards. These include the APR rates on the card (which indicate how much interest you will have to pay on borrowed money), any registration fees and possibly annual fees. You should also look into the details of earning the rewards, to make sure there isn't any sort of catch. Remember to find out how much you will be rewarded: if you will only receive 0.001p for every £100 you spend, it's not worth your while. Be wary of these rewards: some reward credit cards may pull stunts like this in an attempt to trick you.

You may be wondering: what's the catch? And yes, there is a catch, but luckily there is a clever way to avoid it. Typically rewards cards use their rewards to entice customers in. Many will see the potential rewards and pay little attention to anything else - including the all important APR rate of the card. Rewards cards often charge rates of up to 20% APR, a lot higher than most regular credit cards. It is crucial to remember that any benefits gained from rewards cards are insignificant compared to the extra interest payable.

But there is a way round this. As well as setting up an account with a rewards card, also set up a debit account (you will receive a direct debit card; this type of card doesn't offer credit, just the function to store your money safely in a bank account and make payments from the card). Using your direct debit account, you can repay the money spent on the rewards card in full each month, therefore avoiding any interest payments.

If you don't think you will be able to repay any money borrowed in full each time a payment is due, then a rewards card simply isn't for you. You will save a lot more money by finding a credit card with a low interest rate.

So if when researching credit cards you find a rewards card suitable for you (in terms of the rewards it offers and your ability to pay money back in time) it is definitely worth signing up. But remember, always look at the fine print, and seek opinions on the card from unbiased websites that will give you a clearer picture.