Reward Credit Cards
Are reward credit cards really worth the effort?
Friday, 16, Apr 2010 12:34
As reward credit cards make a comeback, Kate Saines takes a look at what, if anything, they really offer.
There has been a recent flurry of activity in the credit card market which is likely to be of interest to anyone who likes their flexible friend to do more than just purchase goods.
Reward credit cards have made a return and - according to the hype - are remunerating loyalty even more generously than before.
Apparently there was a period when credit cards which offered points, prizes or even a little bit of cash back were doomed to extinction.
However, in the last month more providers have begun tempting us again with a new range of cards and incentives which mean that every time we spend on our plastic we are supposedly getting something back.
But are these cards a clever way of budgeting or just a way of luring us into borrowing more credit we cannot afford?
Cynics suggest these new offers are just ploys to ensure customers stay with the card provider for longer than the zero per cent introductory offer.
But if you use your credit card regularly, why not earn something back?
Centre stage at the moment in the reward credit card world are Sainsbury's and Barclaycard which have both just launched new products to very loud fanfare.
Sainsbury's Nectar Credit Card is one of two cards launched by the supermarket's finance arm on April 6th.
Offering an APR of 12% on purchases and balance transfers, the card rewards customers with double Nectar points on their shopping in store, online and in petrol stations for two years.
The extra Nectar points are the equivalent to an additional one per cent off a Sainsbury's shopping bill.
According to Moneysupermarket.com, you will receive 4,000 points per £1,000 spent if you use the card in store alongside your Nectar card. If you use the card elsewhere, you'll earn 200 points per £1,000 spent.
At the same time, Sainsbury's launched another card offering zero per cent APR for the first 12 months on purchases and balance transfers. After that there is a typical APR of 15%.
Peter Harrison a credit card expert at Moneysupermarket, warns that while both of Sainsbury's new offerings look good at face value you have to be a Nectar customer to get them.
He adds: "When compared to the current best buy offerings both products shape up pretty well in terms of introductory periods, APRs and benefits and will be especially attractive to anyone shopping at Sainsbury's on a regular basis.
"However, the Nectar Credit card isn't a recommended card for lending."
Sainsbury's admits the card was launched in a bid to get its shoppers interested in its financial activities.
Stuart McKeggie, head of Sainsbury's Credit Cards, says: "Our strategy is very much focused around encouraging more Sainsbury's shoppers to take out our financial services products, and to do this we need to ensure we continue to offer them exclusive deals that are extremely attractive."
The Nectar credit card has been coined as niche by industry experts because it is targeted at a small group of people - loyal Sainsbury's customers.
Andrew Hagger of website Moneynet, says there is now more emphasis in the credit card market on rewarding customer loyalty in an effort to encourage longer-term customer relationships.
Barclaycard has done something similar, although has not cornered such a small area of the market.
Its new 'Freedom' initiative allows you to earn rewards at 30,000 retail outlets including restaurant chains like Pizza Express and with energy suppliers such as npower.
Points are earned when transactions are made in participating stores or outlets and customers will receive these points in pounds and pence to make it easier to calculate what they've earned. They'll earn £10 for every £1,000 spent.
Peter Harrison describes the scheme as an "innovative move".
But he says before considering signing up to a Barclaycard, people should ensure they consider whether they are likely to use the card.
"Although Barclaycard says that 30,000 retailers have signed up to the scheme, you need to make sure you will gain a benefit from this," he explains.
"If you are unlikely to regularly shop at one of these retailers, then you may be better looking at an alternative rewards card which rewards all your spending."
But, by the looks of things, there may be few alternatives.
David Black, banking specialist at financial research firm Defaqto, says credit card providers have faced a lot of knocks recently which means they simply cannot afford to offer the grand benefits they used to.
Caps on default charges, problems with fraud, bad debts, customers opting into credit card cheques instead of opting out and massive drops in income from fewer people taking out payment protection insurance have hit provider's income streams.
"For this reason," says Mr Black, "I expect credit card offers to become less attractive in the short to medium term."
There are of course still some other reward credit cards on the market. And Defaqto says these fall into four categories - those offering cashback, cards allowing you to collect airmiles, points schemes and shopping reward schemes.
You really need to have a good credit rating to take full advantage of these cards.
And there is no point it taking one out if you do not pay off the balance in full every month. Being charged 15.9% interest on a balance of £2,000 is going to cost you far more than the two per cent cashback you will earn from making lots of purchases.
David Black says: "If you don't pay off your entire credit card balance each and every month you should really concentrate on the interest rates charged rather than any reward scheme."
However, he also points out that if you are religious at paying off your entire balance each month then it makes sense to get a credit card which offers rewards.
And, if you have an exemplary credit rating, you are also in a good position to enjoy the benefits of these cards.
"People who have a good credit rating," says Mr Black, "have an incentive to change their credit card on a fairly regular basis because many credit card offers - be it zero per cent introductory offers or rewards - are stacked in favour of new customers in the form of enhanced introductory deals."
He uses the example of American Express's Platinum Cashback credit card. Users can earn five per cent cashback for the first three months up to a maximum of £100.
After three months this cashback offer plunges to 1.25 per cent if you spend over £7,501 in the year. Spend under £3,500 and you'll only earn 0.5 per cent cashback and those spending £3,501 to £7,500 will receive one per cent in return.
But, beware, if you don't have a good credit rating, you will not be able to take advantage of the best deals.
The message is clear, if you are sensible and pay off your credit card balance every month, you really can reap the rewards. But make sure you choose a card which benefits you. Don't be sucked into Sainsbury's Nectar card if you only shop there twice a year and if you never fly, don't bother with a card paying airmiles.