So most of us have a credit card (or two, or three), and whilst I’m not advocating getting yourself into debt on multiple cards (or even one), choosing the right card for your lifestyle can provide some tangible benefits.
I have three credit card accounts, all of which are paid off monthly, so I don’t incur any interest. But only one card is my primary card account and it’s the one with the highest rewards best suited to my lifestyle. The other two are overflow cards for my businesses (in case of insurance expenses, property renovations, etc.) and yes, I should probably cancel them and save the annual fees but having them there just in case gives me peace of mind and added security.
For me my indulgence is travel, and so naturally I choose a frequent flyer card. And in fact last year I flew FIRST CLASS to Singapore on a Qantas A380 purely on points. With a facial beforehand and a three course meal cooked to order with matching wines I hadn’t even left the first class lounge and I was already in bliss. One the plane I was greeted with 1996 Tattinger Champagne (as much as I could handle) and all my food and beverages were individually selected and prepared. And the lie flat bed pods with wide screen LCD TVs and automatic window shades … oh, it was so good.
BUT, if flying is not your thing and other things are more important to you it makes sense that you need to select a card that’s more in line with what’s important to you. So if you’ve got multiple cards (or no card at all) and are not sure what card to choose, here are some pointers.
Maximise Your Purchases
I’m not talking about spending more than you have or taking it to the limit. As I said I pay my cards off in FULL each month. So I’m talking about a change of mindset. Before you pay for ANYTHING, check if they take a credit card and if they charge a surcharge then make the decision whether it’s worth the surcharge.
Analyse Your Annual Spend
I pretty much live on my credit cards – everything I but goes on them unless the vendor doesn’t accept them. So there’s no cash coming out of my account during the month other than my mortgage payment and a little cash spending money for incidentals.
So the next step is to determine how much a month you’re likely to spend on the card and multiply it by 12 to get your average annual spend. Remember, some expenses are not monthly so you’ll need to factor them in along with the added cost of any surcharges vendors may charge.
So if you’re likely to spend $2,500 a month on the card then that’s a whopping $30,000 a year. And if the vendors charge 2% surcharge then that’s cost you extra for the points, although supermarkets, petrol stations and most retail outlets will not charge a surcharge. So let’s say half of your purchases will charge you 2% – then those points are going to cost you an extra $300.
Find the Cards with Rewards Relevant To Your Lifestyle
Find out the cards that offer the sorts of things that you’d like. There is no point in earning rewards that you won’t actually use (such as earning frequent flyer miles if you rarely travel). But pretty much every card that has frequent flyer also offers a rewards program that includes accommodation, magazine subscriptions, appliances, entertainment and services (like flowers, wine subscriptions, etc.)
Analyse the Shortlist
POINTS:
Once you find the cards that suit you then you’ll need to analyse them. Some will give you more points per dollar spent (like Platinum cards) but don’t forget to investigate the exchange rate of points into cash. For example Card A may pay you 1 point per dollar, and it takes 5,000 points to redeem a product or voucher worth $50 – so that’s a return of 1% per dollar spent. But Card B may pay 1.5 points per dollar spent, and it takes 6,000 points to redeem a product or voucher worth $50 – so that’s a return of 1.25% per dollar spent.
Check the terms and conditions of earning points. Platinum credit cards typically return the highest number of points per dollar, but some cards actually have a limit to the number of points you can earn per month. And if you’re into frequent flyer points like I am then check the transfer rates to points, miles or airpoints – they don’t all work the same way. And check the card works with your chosen airline program, and that you can use your points for upgrades as well as free flights.
Some sites calculates it would take 8.4 years, with a spend of $1142 a month, for the average Australian shopper to earn a “free” return economy flight to London, you can accelerate this to under a year by using the “earning and burning” method. The aim of this challenge is to collect as many points as you can, especially with the lowest acquisition cost and spending them in the most effective way.
ANNUAL FEES:
Many cards with low interest rates have really high fees and vice versa. But some cards with a higher annual fee offer additional services like a concierge service, free flights, travel insurance or extended purchase warranties. But many cards not only have an annual card fee, they also have a rewards program fee to participate in the program. So check all the terms and conditions and make sure you will use the added extras.
INTEREST RATES:
If you’re not going to be super diligent that you’ll pay each card off in full by the due date then you’ll also need to check the Annual Interest Rate on each card and compare it. A small change in interest rate can lead to a big change in the dollar interest amount. And interest compounds meaning that interest is charged on the interest if you don’t pay it all off. So watch out for the catches here. And a little tip – often cards with frequent flyer programs have higher interest rates.
TERMS AND CONDITIONS:
Check for any additional terms and conditons of the card that may impinge on your lifestyle or ability to earn points or to meet your card repayments.
Check the Card Limit Offered
If you’re going to pay your card off in full every month then you’ll need a card limit of at least twice your monthly spend. But be warned, any card that you do not pay off in full will not only have interest added to the total, it will also contribute significantly to the liabilities of any loan or mortgage application, reducing what you can borrow.
Be Wary of Introductory Interest Rates
The catch cry of many card offers is their low introductory rate for a period of time on new purchases or on transferred balances. If you check the small print what you’ll find is the rate is often more than other cards, and worse still, sometimes there can be back billing if you don’t pay off your transferred balance within a specific period of time.
Watch for Introductory Rewards Point Bonuses and Specials
Quite a few cards offer special introductory rewards rates for the first few months your account is open or for the first few thousand dollars you spend on the card. And many have bonus points when you make purchases with specific partner companies, and less on other purchases.
Minimise Your Active Accounts
It’s pretty simple, by minimising you card accounts you can minimise your annual frees and maximise the points earned (provided your credit limit is sufficient) giving you greater bang for your buck. And it’s the pooling of these points into one account that will get you rewards or flights much faster.
Spend Your Points Wisely
Online stores where airlines let you redeem points for products often have the worst value for your point – you can get better prices from retail stores. The only exception is store vouchers (like David Jones and Myer) which you can use for products on sale getting you additional valuable discounts and making your money work even harder!
Don’t use points to purchase economy flights as the points ‘exchange rate’ is terrible most because rewards flights are only sold at full points rates (i.e. not discounted) but there’s often aggressive discounting on tickets for domestic flights if you’re paying via credit card.
Instead use your points for premium, business or first class tickets on international travel. This is where you’ll get up to ten times the ‘exchange rate’ for your points giving you the best value (and comfort). And flight upgrades on the same are just as good – just make sure your economy ticket is eligible for an upgrade before you buy it. Many of the cheapest seats don’t qualify for an upgrade but the airline or your travel agent can advise accordingly.
Summary
Just like the Aussie dollar, credit card points are a form of currency so it pays to treat them the same way as you’d treat your bank balance. Getting the most out of your rewards cards involves some basic planning and performing a bit of analysis to choose the right card for your lifestyle, interests, and spending habits.