Getting your just rewards
Credit card issuers quote the "earn" rate on their rewards schemes not the "burn" rate.
The "earn" rate is the number of points you get for each $10, $100 or $1000 you spend and the card issuers are keen for cardholders to understand that more spending means more points amassed.
The "burn" rate, which is the value of rewards the cardholder gets for each $10, $100 or $1000, is more opaque and cardholders have to put in quite a bit of effort to work it out.
Research agency Canstar crunched the numbers on 31 rewards programmes- both frequent flyer and general rewards- to determine how they stack up in terms of value for money.
The first thing rewards scheme customers should know is that when it comes to value for money in the non-flights "general" rewards area, the merchandise rewards such as magazines, toasters and toys provide the best burn rate. That's followed by "shopping vouchers", and lastly the cash-back rewards.
That merchandise rewards stack up the best by value because of the substantial discount to ordinary prices the card issuer is able to negotiate from a wholesaler supplying the goods. So when retailers look at the burn rate, it looks attractive.
Vouchers, which are exchanged for goods in stores, are also sourced at a discount, but the discount it necessarily lower as the stores have higher overheads than wholesalers.
But the cash to pay for the cash rewards comes directly out of the card issuer's pocket.
Based on a monthly spend of $2000, the break-even time for the merchandise rewards across the different rewards scheme was just under six months (see chart). For shopping vouchers, it was just shy of eight months and for cash rewards it was just over 10 months.
Canstar's Derek Bonnar says people seeking to get the best from rewards schemes need to follow a few simple rules.
Bonnar says there is value in rewards schemes providing you put enough spending through your card to offset the annual fee.
And if you are not paying your card off in full each month, you should consider ditching the rewards card and switching to a low interest card.
It is also important not to let rewards drive your spending but to accept rewards as a bonus that comes from your ordinary and disciplined use of a credit card.
Some changes of behaviour to capture rewards made sense, such as instead of buying that new sofa with the eftpos card, putting it on the credit card and then paying it off at the end of the month. That way, you get the rewards and don't end up paying any interest.
People also needed to think carefully about what type of rewards scheme they opt for.
Many people choose rewards schemes which provide flights, which tended to be more attractive to people spending a lot across their credit cards. There are two competing airline schemes - one linked to Air New Zealand and another to Qantas. Canstar's research showed that for domestic flights, at a monthly spend of $4000, the Air New Zealand schemes provided the best value.
At that level of spending, it would take an average of 8.6 months to amass the points needed to buy a flight from Auckland to Wellington while it would take an average of 10 months to get that flight from a Qantas-related scheme.
Overall the spend needed to get some of the flight rewards puts them beyond most cardholders. Canstar calculated, for example, that earning an Auckland to Wellington flight would cost between $9,467 and $24,850 depending on which credit card rewards scheme a person is a member of.
The lower spends are those on platinum and gold cards with high annual credit card fees.
To earn a flight from Auckland to Sydney required a spend in the range from $25,000 to $91,345 while qualifying for one from Auckland to Los Angeles required a spend ranging from $80,000 to $286,269.
When it came to trans-Tasman and international flights going further afield, Qantas delivered flights faster. It would take an average of 28.8 months to get an Auckland to Sydney flight with a Qantas-related rewards scheme, compared to 28.8 months with an Air New Zealand scheme.
To go from Auckland to Los Angeles at that level of spending would take 82.5 months (nearly seven years) with a Qantas scheme and 94.5 months (nearly eight years) with an Air New Zealand scheme.
A full comparison of how rewarding the flights schemes are is available on Canstar's website at www.canstar.co.nz
- Sunday Star Times