Rewards credit cards

How does a rewards credit card work?

Rewards cards rely on the "interchange fee" – the charge credit card providers impose on retailers for processing payments. With rewards cards, this fee is typically higher, allowing banks to fund rewards for cardholders.

In return, retailers may face higher spending from customers using rewards cards, as some issuers offer exclusive deals with brands like travel companies and supermarkets, providing bigger rewards than just a simple cashback percentage. Here's how it works in three simple steps:

• Make purchases - Each time you spend, you can earn something back in reward points as a reward for your loyalty - this can be cash or special deals

• Earn rewards - If you pay off your balance in full each month you get the reward card perks without paying any interest

• Redeem your perks - Some of the best credit card rewards allow you to exchange points for store discounts, gift vouchers, hotel stays and even almost free flights

If you have existing credit card debt, or are paying interest on one or more credit cards, reward cards are probably not for you. You could consider balance transfer credit cards instead.

Is a rewards card right for me?

Rewards credit cards can be a great way to earn perks on your everyday spending – but they’re not for everyone. These cards can come with higher interest rates and, in some cases, annual fees, making them most beneficial for those who pay off their balance in full each month.

If you tend to carry a balance, the cost of interest could outweigh any rewards you earn. Over time, this could turn what seems like a good deal into a pricey burden.

If used responsibly, a rewards card can offer valuable benefits such as cashback, travel points, or additional perks like travel insurance and purchase protection. Before applying, consider your spending habits, financial discipline, and whether the rewards align with your lifestyle. 

The pros and cons of rewards credit cards

Advantages

• Earn rewards on everyday spending

• Sign-up bonuses can deliver high upfront value

• Flexible perks ranging from travel discounts to money off shopping

• Widely accepted, especially via Visa and Mastercard

Disadvantages

• Rewards cards often carry higher interest rates

• Annual fees can reduce the overall value

• Some rewards may be restrictive

Tips to get the most from your rewards credit card

• Maximise spending in reward categories: Many rewards cards offer bonus points for specific types of spending, such as travel, dining, or groceries. Focus your spending sensibly in these categories to earn more rewards.

• Meet minimum spend requirements: Some cards require a minimum amount to be spent each month or within a certain period to unlock rewards. Be sure to meet these thresholds to fully benefit from your card, but only spend what you can afford to pay back.

• Take advantage of sign-up bonuses: Some rewards cards offer a sign-up bonus if you meet a spending requirement within the first few months. This can be an easy way to accumulate points quickly.

• Set up a direct debt or pay off your balance: To avoid interest charges, always clear your balance in full each month. This will ensure rewards are not offset by high interest rates.

• Redeem strategically: Be mindful of how and when you redeem your points. Some rewards may have better value when used for travel, while others may be more useful as cashback or for vouchers.

• Be mindful of expiry dates: Rewards points or perks may have an expiration date. Stay on top of this to avoid losing any hard-earned rewards.

• Use additional perks (if available): Many rewards cards come with extra benefits such as travel insurance, purchase protection, or airport lounge access. Make sure you’re taking full advantage of these added features.

• Credit utilisation: Keep your balance low (under 30% of your limit) to maintain a good credit score.