Credit card schemes not worthy

Most consumers better off without credit cards despite the loyalty or reward schemes

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 4, 2013 2:18 pm AEST

As credit card spending drops, banks are devising more ways to entice consumers to get us flashing the plastic.

At the top of the list are loyalty or rewards program linked credit cards, but consumers need to be aware of the small print. According to comparison website Canstar, most credit card loyalty schemes aren't worth it for most consumers, and could in fact mean people go backwards trying to spend to earn points.

Additionally, Canstar has found that on average a shopper would need to spend close to $20,000 just to get a $100 voucher or reward. Ten years ago, the spend required for the same voucher was around $12,000. And with many schemes charging an annual fee of anywhere between $49 and $400 and over, the rewards just don't stack up.

Most Australians spend an average of $18,500 a year on credit cards, which means most of us wouldn't even qualify for a $100 reward. Add on the whopping interest rates of 20%, and most of us will be paying more in interest than we could receive as a reward. Of the $49 billion Australians have racked up on their credit cards, around 72%, or $35 billion is being charged interest.

As Canstar analyst Adam Bea notes, "As soon as you start to pay interest, a lot of these rewards are pretty redundant."

So the next time you are offered a credit card with a loyalty or rewards scheme attached, it pays to read the fine print to see what the fees and interest rates are, as well as working how many points you are likely to receive, and how that translates into a reward or voucher.

Canstar rates several cards as outstanding value, including David Jones (ASX: DJS) Membership Rewards card from American Express, and two Mastercards from Coles – owned by Wesfarmers (ASX: WES). Myer Holdings' (ASX: MYR) Visa Rewards scheme also gets a five-star rating from Canstar. Woolworths' (ASX: WOW) Everyday Money Rewards scheme gets a four-star rating, thanks to its lower cash return per year.

Foolish takeaway

Most consumers would be better off getting rid of their credit cards and avoiding annual fees, interest charges – no matter what rewards are on offer. At the end of the day, the banks aren't known as charities, and they are promoting these schemes for a reason.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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