Why a rewards credit card could be your best bet

Credit cards are not only useful for seeing you through a tight spot, a growing number also offer some fantastic rewards – if you use them wisely.

09:26 01 May 2013

As more of us get into the habit of paying off our credit card balance in full each month, reward credit cards have started to grow in popularity, prompting more providers to launch competitive deals onto the market.

 

Sainsbury's Bank, for example, recently unveiled both its Low Rate Cashback credit card and its Low Rate Nectar credit card, which you can read about here.

 

What are reward credit cards?

 

Reward credit cards generally fall into two camps. The first allows you to collect points whenever you spend on your card which can then put towards the cost of your shopping, days out, holidays or flights for example.

 

Cashback credit cards, on the other hand, enable you to earn a percentage of the amount you spend as cashback. The amount of cashback you receive will depend on the provider but usually varies between 0.50% and 5.00%.

 

In most cases the cashback you've accrued will be credited to your account after 12 months, although you may be sent a cheque instead. Watch out though because some cashback cards also charge an annual fee which can eat into the money you make back. So weigh up whether you're likely to earn enough cashback to make paying this fee worthwhile.

 

To get the most out of your reward card, you’ll need to use it for your every day spending (food, clothes, nights out) so that you rack up more points/cashback. But the golden rule is to clear your balance in full every single month as the cards typically come with high annual percentage rates (APRs) which will far outweigh any rewards/cashback you've earned.

 

Growing appetite for rewards

 

The number of credit cards offering rewards or cashback has been creeping up in recent years. Research from Defaqto shows that in April 2007, there were 17 cards offering cashback. Today that number stands at 20. And there were 30 cards offering points schemes six years ago, compared to 46 today.Cards offering airmiles have increased from 11, in 2007 to 24 today.

 

However, the number of cards offering shopping rewards has actually declined considerably over the past six years, standing at 48 today compared to the 123 available in April 2007.

 

The best reward credit cards

 

So what’s out there? If you're after a points card, the Barclaycard Freedom Rewards Credit Card enables you to earn three points per £1 spent at selected Freedom partner stores (including Cafe Rouge, Strada, Currys PC World and BHS), two points per £1 spent at UK supermarkets and petrol stations and Transport for London expenditure, and one point for every £1 spent elsewhere.

 

Rewards start from 1,750 points for a £5 Freedom Rewards voucher. And if you spend £500 in the first three months, you'll receive £30 worth of vouchers. These vouchers can be spent in a number of high street stores, including Boots, Next, Lakeland, and Homebase, or at restaurants such as Pizza Hut, Strada and Beefeater. Alternatively, you can spend them on days out at places such as Thorpe Park, London Zoo and Warwick Castle, or use them to pay for theatre tokens, a trip to the cinema or a holiday.

 

However, if you are a keen traveller, you might prefer a credit card that allows you to collect airmiles – or, as they are now known, Avios.

 

The Lloyds TSB Duo Avios credit card is in fact two credit cards – an American Express card and a MasterCard. American Express isn't accepted in all retailers, so you can use your MasterCard as a back-up. You'll receive one Avios point for almost every £1 spent on the American Express card and one Avios point for every £5 spent on the MasterCard. You will receive double points for any spending overseas.

 

For a limited time, you will also receive 15,000 Avios if you spend £500 a month for the first three months. To give you an idea of how far this will get you, you'd need 9,000 Avios for a return flight to destinations such as Nice, Amsterdam and Prague. But you will need to pay taxes, fees and charges on top. You can find out more about this card and alternatives here.

 

The best cashback credit cards

 

Those preferring to earn cashback should take a look at the Barclaycard Cashback card which offers 6.00% cashback for the first three months on your five biggest monthly purchases, up to a maximum value of £120.
After that you earn 2.00% cashback on your top five monthly purchases and 0.50% on everything else. You'll also get a 4.00% 'thank you' bonus every year on your top five purchases during the month you took out the card. But watch out for the £24 annual fee.

 

Alternatively, the American Express Platinum Cashback credit card offers 5.00% for the first three months and 1.25% after that. In addition, you will receive double cashback (2.50%) for one month every year, providing you have spent more than £10,000 in the previous 12 months. Again though, there is a fee with this card of £25 a year. You'll also need an annual household salary of £20,000 or more to apply for the card.

 

If you spent £1,000 a month on these cards, MoneySupermarket calculations show you could earn £221 over the course of a year with the Barclaycard, or £200 with the American Express card (taking the fees into account).