Credit card rewards programs are a popular way for financial institutions to attract and retain customers. These programs promise various perks, such as cashback or travel miles, but are they really worth it?
In this blog, we’ll break down how these programs work, the costs involved, and the true value of the rewards. We’ll also explore spending habits that can help maximise or diminish their potential benefits.
How Credit Card Rewards Programs Work
At the core, credit card rewards programs operate on a simple concept: earn rewards based on your spending. These rewards can come in several forms:
- Points: Many cards offer points for every dollar you spend. These points can be redeemed for various items, including products, gift cards, flights, or hotel accommodations.
- Cashback: Cash-back rewards used to be offered in a % of total spend form, but now many programs offer fixed cashback amounts instead.
However, it’s important to note that each program has its own specific rules and redemption options. For instance, some cards may require a minimum spend to qualify for bonuses, while others may have caps on how much you can earn each month. Some programs use a tiered structure, where you earn more points at first but less as you reach higher spending thresholds. For example, you might earn 2 points for the first $5,000 spent, 1 point for the next $5,000, and nothing beyond $10,000.
Other common promotions and features are one-time bonuses like waived annual fees or large point rewards for signing up, as well as ongoing incentives for purchasing certain items.
The Costs Involved
While the allure of rewards is tempting, there are costs to consider:
- Annual Fees: Many rewards cards come with annual fees, which can range anywhere from $50 to several hundred dollars.
- Interest Rates: Rewards cards often have high interest rates—typically above 20%.
- Foreign Transaction Fees: Some cards charge fees for purchases made outside of your home country.
- Redemption Fees: Travel-related rewards, in particular, may come with extra fees for booking or other charges.
- Merchant Fees: Credit card surcharges passed on by each retailer to the customer, to recover their costs of providing payment methods.
It’s crucial to weigh these costs against the potential rewards you’ll earn, as they can quickly eat into the benefits.
Evaluating the Monetary Value of Rewards
Determining the actual value of rewards can be tricky. For example, credit card promotions often boast about the large number of points or miles you can earn, but it’s important to know their true monetary worth. Typically, points and miles are valued between 0.5 to 2 cents each, depending on how you redeem them. Cashback is straightforward, but points and miles vary significantly in value depending on how they’re used.
For instance, travel miles may be worth more when redeemed for first-class flights compared to economy seats. To put things into perspective, consider a typical rewards structure where you earn 1 point for every $1 spent. If you want to earn a $100 reward, you’d need to spend $10,000—hardly an immediate payoff.
Should You Pay Your BAS Using a Credit Card?
Here at MJJ Accounting and Business Solutions, we’ve noticed an increasing trend of businesses using credit cards to pay for government remittances like Business Activity Statements (BAS) and PAYG Instalments.
On the surface, this seems like an easy way to rack up rewards on large payments you were going to make anyway. To better understand the costs and benefits of this approach, we conducted a case study using a common quarterly BAS payment of $20,000 and the American Express Platinum Business Card.
Let’s break it down:
The fixed cost of the American Express Platinum Business Card is normally $1,750 per year. For every dollar spent on government-related expenses (like BAS payments), you earn 1 point. Although the card advertises 2.25 points per dollar, this rate doesn’t apply to government payments.
Now, assuming you manage your payment and repayment cycles well—avoiding late fees—here’s the question: Will using your credit card to pay a $20,000 quarterly BAS earn rewards that outweigh the costs?
The short answer is no. Let’s look at the numbers:
- Annual spend on BAS payments: $20,000 x 4 quarters = $80,000
- Points earned: 80,000 points (1 point per $1 spent)
- Redemption value: 80,000 points x 1 cent per point = $800 in rewards
Less Costs:
- AMEX Card Payment Fee by ATO of 1.45% on $80,000 = $1,160
- AMEX Annual Card Fee = $1,750
This means that after earning $800 worth of rewards, you’ll still be worse off when you factor in the ATO card payment fee and annual credit card fee. This doesn’t even include potential interest charges or late fees.
Of course, not all cards and rewards programs are equal, so you would need to check the terms of your particular credit card and rewards program attached.
Final Thoughts
While credit card rewards programs can seem enticing, it’s important to be realistic about the costs involved and the actual value of the rewards; and remember that credit cards are primarily designed by financial institutions as profit-generating products. In many cases, businesses and individuals may find that the benefits of rewards don’t outweigh the expenses, especially if high interest rates, fees, or a limited value on points come into play. Before committing to a rewards card, we recommend taking the time to understand the program details, calculate potential rewards versus costs, and decide if it aligns with your financial goals.
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