Should I get a credit card that earns rewards?
It's no secret that banks and credit card providers lure customers with promises of free rewards. The ads look enticing with flights, holidays and luxury goods as temptations to use their cards. But it's important to stop for a moment and ask, are credit card rewards programs worth it?

Banks and credit card providers are in this game to make money. So consider this: if all these credit card rewards are so lucrative for cardholders, how are the card providers paying for it and still turning a profit? The answer is complex and comes down to several main sources of revenue for them: annual fees, high interest rates, fees for missing payments or making part-payments, interest penalties and merchant charges. In all cases, except for the last, this is what you will pay. Sometimes the merchant fees are added as a credit card surcharge on purchases, other times it will be distributed in terms of higher prices across all goods sold through an outlet. Make no mistake about it, credit card companies will extract a profit from your spending habits in more ways than one.

On top of this, credit card providers and their attached loyalty programs skim more off the top from holders who never redeem points through points expiration, not having enough points to gain a reward or cancelling their cards before redeeming the points. Some make even more money through points devaluation. Devaluation is when airlines and loyalty programs increase the number of points needed for the same rewards. Since it costs more points, the value of each point falls. The programs book a certain cost against each point you redeem, so devaluing the points decreases this cost to them. The corollary of this devaluation is loyalty programs reducing the points you earn, as happened with the 2017 changes to credit cards where points earned per dollar were substantially cut. This squeezes loyalty members from both sides: you earn less points, but it costs more to redeem a reward. Here is one example using Westpac Altitude Rewards and redeeming a one-way business flight from Sydney to London on Singapore Airlines. Until August 2016, it would have needed a spend of $53,800 on a black American Express card earning 1.5 Krisflyer points per dollar. Due to decreased earn rates from credit cards from July 1, 2017 and Krisflyer program changes, this almost doubled to $105,000 in less than a year.

Assuming you are a good credit card user and pay off your monthly payments in full and elect to pay by alternative means if a surcharge is added, you are still left with the annual fee.

The annual fee is the first part of evaluating if a rewards credit card is for you. Some can charge over $1,000 a year in annual fees, but you are more likely to be paying somewhere in the $200-$395 range per year.

Before proceeding, there are some other aspects that are important to understand. The rewards are rarely 'free'. A small group of rewards like gift vouchers may come with no extra costs, but it is little surprise that these are often the worst way to use points. Physical items redeemed with points often require a set delivery charge (without a pick-up option) and can often be purchased cheaper elsewhere.

Airlines that offer a reward flight will hit you with a host of surcharges and taxes that can be, on Qantas, 20-35% of the price of a normal economy ticket. Virgin typically lies in the 5-10% range. On Qantas, a flight can be bought Sydney-Melbourne for $130-$180 (it varies considerably). However, cashing in your points will still see you forking around $35 for a reward flight. Expensive tickets on the same route are priced that way because of demand, so these are less likely to have a rewards seat available. Many times reward seats are only available for low demand flights where the ticket price is generally the cheapest anyway.

It is possible to make the system work for you, and on this site we cover many ways to help with maximising your benefits. Like all things we cover, we look at the cost versus the reward. Which leads us to annual fees.

Annual fees
As a general rule, we value frequent flyer points at 1 cent each. The reality is more complex but it is a simple yardstick you can use to evaluate if a rewards card is worth it. Sometimes the point's value may be less, other times, more. It all depends on how savvy and lucky you are when it comes to redeeming rewards.

Take this example from one of the cheaper rewards cards. A $100 annual card fee for a card earning 0.5 points per dollar would need you to spend $20,000 a year before it is worth it. Now you're spending $20,000 per year to gain $100 of benefits, but you already pay $100 each year for the card. Plus there is the cost of the reward. A reward flight from Sydney to Melbourne costs 8,000 points on Qantas, and $35 extra. You would have to spend $16,000 to get that reward, and still have to chip in $35. Interestingly if you bought the ticket at $130, you would earn 800 frequent flyer points. Choosing a rewards flight means you have to consider the points you forgo as these tickets do not earn frequent flyer points.

If you paid $100 for the annual fee, spent $16,000 on the card, and chipped in $35 for the flight reward, your net benefit is nothing. If it cost $135 using the credit card rewards ($35+$100 annual fee), that is around the same price as buying a cheaper ticket on the same Qantas flight. To make this even less compelling, in our tests we found Virgin flights were around $99 to fly on the same dates and around similar times. Naturally, this may vary depending on timings and destinations, but it's good to double-check.

Qantas versus Virgin Our test: July 19, 2017 Sydney to Melbourne, Qantas (left, excluding Jetstar) versus Virgin sorted by lowest price. Qantas is $130 for a paid seat, with a reward flight available at 8,000 points plus $35. Virgin has similar morning flight times for $99 (click image to enlarge).

Paying a higher fee to earn more points
As a general rule, you get an increase in the number of points and perks you receive as the annual fee gets higher. However, unless you are looking at spending big ($50,000-100,000 per year), the numbers are less favourable for higher annual fees. You may earn 1 point per dollar on a card costing $350 per year, but until you spend more than $35,000 a year on the card, you will be behind. At least with the money you save on the annual fee you'll be able to spend freely and not be locked into a rewards program where the rewards are subject to availability, may require you to pay more in charges, or could be devalued. To be fair, higher fee cards also include extra features, but make sure you are likely to use them before committing.

The best rewards credit cards for low spenders
There are three cards that we found that earn points with no net annual fee. The first is not much, but a zero annual fee makes it worth investigating if the amount you spend doesn't justify the annual fee of other cards. It's the Coles No Annual Fee MasterCard. You don't have to shop at Coles to use it, but you will need to join Flybuys to earn rewards (it's free). The numbers are not great, but they are better than nothing. You earn 0.5 Flybuys points per dollar. Converting this to the points of frequent flyer partner, Virgin, will require a minimum of 2,000 Flybuys points to earn 870 Virgin Velocity points. This means each dollar you spend earns 0.218 Virgin points. Or spend $4,000 before you earn your first 870 points. You won't be flying anytime soon based on that that earn rate. However, it is better than paying an annual fee and getting less back in rewards. For other ways to earn points in the program, see our Flybuys Tips.

A better option for people who desire Virgin frequent flyer points is The American Express Velocity Escape Card. With no annual fee, it earns one point per dollar spent but as this is an American Express card, you may find it attracting a surcharge or not being accepted as widely as Visa or MasterCard. The third option is for travellers who fly at least once a year and it is the Virgin Australia Velocity Visa card. Now, it has an annual fee of $129. However, each year you get a Virgin voucher (and only one per year) worth $129. The card earns 0.66 Virgin points for the first $1,500 spent per month, then 0.5 Virgin points per dollar, over double the rate of the Coles MasterCard, but less than the American Express. Another factor is that the voucher can be used only once, so you'll still be paying for the return trip (if needed or you could use points) or forgo the remaining balance if the voucher is not all spent.

How to work out if you should get a rewards credit card
1. Work out how much you spend a year on credit cards (assuming you pay it off in full every month).

2. Using the earning rate of points on the card and assigning a value of 1 cent per frequent flyer point, put a value on the rewards.

Be aware that 'reward' points don't automatically equal frequent flyer points. Some programs may create the illusion you are earning good reward rates, but then stiff you when you convert the credit card rewards to airline points. For example: one rewards point equalling 0.5 frequent flyer points, meaning your airline points are, in reality, being earned at half the rate of rewards points.

3. Find out the annual fee, and assume over the years it will creep up.

4. Now see if the annual fee costs more than the benefits you receive.

For Example
You estimate that you spend $25,000 a year on credit cards. At 0.5 points per dollar, it earns 12,500 points, worth $125. If the annual fee is less than $125, you'll be ahead, if a card costs more per year, you won't get a net benefit.

And finally
Most people will have a sweet spot when it comes to rewards versus annual fees. It may be worth paying less per year, and having a drop in the earn rate of a card. Conversely some slightly more expensive cards with higher paying rewards may make the balance work in your favour. If none of the annual fee cards work for you, then the Coles MasterCard or Virgin American Express card mentioned above are still an option.

Before you sign up to a card, check which airline is the credit card's partner (or partners). You may prefer to fly Virgin, but if your card is earning Qantas points, this will make it impossible to pool the points to claim a reward. With the exception of Virgin and Singapore airlines, you can't directly transfer points between frequent flyer programs.

Most people working the frequent flyer systems to their advantage have a high credit card spend rate per year, travel frequently or use credit cards to top-up frequent flyer and other loyalty accounts. If none of these situations apply to you, don't over-commit to a points earning credit card as any benefits are unlikely to flow back to you.