What are rewards credit cards?


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Reward credit cards are products that offer ‘rewards’ to people for using their credit card to make purchases. The actual rewards can vary greatly depending on the specific credit card issuer and product. Some offer loyalty points towards popular reward programs (eg. Supermarket), whilst others offer cashback on purchases, but all reward credit cards offer benefits which are directly linked to the amount a customer spends on their card.

How do rewards credit cards work?

Although the rise in popularity of the 0% balance transfers, since the early 1990's, has resulted in many people using their credit card as a cheap loan alternative, credit cards were originally intended to be a more straightforward and convenient method of payment. Retailers and other businesses would accept the use of credit cards because it encouraged customers to spend, but there was always a cost to those businesses accepting credit cards in the form of an 'interchange fee'.

The ‘Interchange Fee’ is the charge to businesses for accepting card payments, to cover the processing and associated infrastructure costs. Originally processing a credit card was a labour-intensive manual process, requiring people to physically process paper based transaction records. These processing/interchange costs were therefore passed on to businesses, as a fee calculated as a percentage of the overall transaction. In this way interchange has always been directly linked to the benefit of the business accepting the payment derived from the sale.

As technological improvements helped automate the payment processing, the costs associated with interchange by the payment networks (Visa, MasterCard, American Express) and passed on to the credit card issuers have reduced considerably. This has helped processors to reduce the cost of interchange to businesses, but it has also enabled credit card issuers to use funds received for interchange to develop reward programs to help acquire new customers, and engender loyalty amongst existing card holders.

Although reward cards often appear to be very different (appealing to very different customers), they are in fact very similar. The rewards earned might take any number of different forms; cashback, loyalty program points, air miles or contributions to charities, football clubs or other organisations, but in every instance card holders earn rewards for spending.

Reward credit card comparison

Although reward credit cards appear to offer their holders 'something for nothing', there are some considerations which should be pondered upon, before making a decision on which rewards are most appealing.

Indeed, for many people in the UK who struggle to clear their credit card balance on a monthly basis, a reward credit card is unlikely to be any value whatsoever. This is because the cost of interest they will accrue on their credit card balance will far outweigh any monetary value of the rewards they might receive.

Individuals who regularly fail to clear their card balance should instead look to minimise the cost of the interest they are incurring with a low rate of standard interest or 0% purchase credit card (or consider whether a credit card is right for their circumstances at all).

Reward credit cards are therefore best suited to people who can confidently clear their balance every month, and therefore incur no cost for earning the rewards they receive.

There are of course, given the abundance of choice in the UK credit card market, some credit cards that couple rewards with an introductory 0% on new purchases. These can be a useful tool for people with more erratic incomes, who may not clear a balance month-to-month, but are very confident it can be cleared relatively quickly. Of course, the danger with these products is that they might encourage individuals to overspend and become ever more indebted, as they focus on the rewards they will receive. So the best guidance is to avoid reward cards when a balance cannot be cleared in full every month, without fail.

Which reward credit card is best?

Given the breadth of choice available in the UK rewards credit card market, most applicants are likely to find cards that offer rewards which enhance their lifestyle. Indeed, many people will discover that a number of different cards are of interest to them.

Where there is a clear choice to be made between specific rewards it is wise to impartially consider which is likely to offer the greatest level of practical return.

For example, many people like the principle of getting a charity credit card - being able to contribute to a favoured charity as they spend initially appears attractive. Nevertheless, impassive comparison of all rewards card products often shows that charities might be better served by donors who use more conventional cashback credit card products to achieve a higher rate of cashback, which they can then donate to their chosen charity (often with the added benefit of gift aid).

Equally, air mile credit cards often offer customers generous incentives to apply, but if the airline in question does not fly anywhere of interest to the card holder, the air miles that they earn are likely to be unused and wasted.

It is perhaps for these reasons that traditional supermarket loyalty schemes credit cards are becoming increasing popular. Familiarity with the schemes, and the breadth of the range of goods and services that points can be exchanged for, reduce the time card holders would otherwise have to spend familiarising themselves with bespoke schemes, making them very convenient.