Credit Cards
Rewards pay you a fraction of what interest takes back
Cashback and points are worth having on a card cleared every month, and worth nothing on a card carrying a balance.
The points below about rewards cards are ordered by how much difference they make, not by how often they get repeated.
What matters most
- Reward rates are typically a small percentage of spending; interest is a much larger percentage of the balance.
- Reward cards often carry higher rates and sometimes annual fees.
- Points schemes can devalue, and the issuer sets the redemption terms.
The arithmetic of the trade
A reward scheme paying a small percentage back on spending is competing against an interest rate several times larger applied to the balance. Suppose a card returns 1 per cent on spending and charges 20 per cent a year: carrying a balance equal to a month's spending wipes out the reward many times over. These figures are illustrative, and the ratio is the point: rewards are measured against turnover, interest against debt.
For anyone who carries a balance, the cheapest rate beats the best reward every time.
Reward cards are priced for it
Cards with strong rewards frequently carry higher standard rates, annual fees, or both. The economics assume a proportion of holders will revolve, which funds the benefits for those who do not. A fee-paying card only makes sense once you have calculated your annual reward against the fee at your actual spending.
Do that arithmetic with last year's real spending, not with an optimistic estimate.
Points are a currency the issuer controls
Airline and hotel schemes can change redemption rates, availability and expiry terms, generally with notice and sometimes with little. Points held are an unsecured claim on a company's promotional programme, not savings.
The useful part is this: earning towards a specific redemption and taking it promptly reduces the risk of devaluation. Treat a large unredeemed balance as a risk rather than an asset.
Where the value is real
For a household that clears the card in full every month, rewards are a genuine discount on spending already happening. Introductory bonuses can be worth more than a year of ordinary earning, provided the qualifying spend is money you were spending anyway. Purchase protections and travel benefits attached to some cards can exceed the cash value of the rewards.
None of it requires paying interest, and all of it disappears if you do.
The behavioural cost
Reward structures are designed to increase spending, and studies of consumer behaviour have generally found that they succeed. Spending more to earn a small percentage back is a loss dressed as a gain.
The useful part is this: chasing a spending threshold for a bonus is the clearest version of this trap. The test is whether you would have made the purchase without the reward.
Adjust the size of it until it is something you would actually do tired.
Choosing sensibly
If you always clear the balance, pick on rewards, fees and protections and ignore the interest rate. If you sometimes carry a balance, pick on the rate and treat any reward as incidental. If you have a persistent balance, the priority is clearing it, and a reward card is the wrong product entirely.
Holding one card of each type, used for the right purpose, is a reasonable structure for many people.
Everything above, in order of what to do first
- The arithmetic of the trade. A reward scheme paying a small percentage back on spending is competing against an interest rate several times larger applied to the balance.
- Reward cards are priced for it. Cards with strong rewards frequently carry higher standard rates, annual fees, or both.
- Points are a currency the issuer controls. Airline and hotel schemes can change redemption rates, availability and expiry terms, generally with notice and sometimes with little.
- Where the value is real. For a household that clears the card in full every month, rewards are a genuine discount on spending already happening.
- The behavioural cost. Reward structures are designed to increase spending, and studies of consumer behaviour have generally found that they succeed.
- Choosing sensibly. If you always clear the balance, pick on rewards, fees and protections and ignore the interest rate.
The takeaway
Rewards are a discount on money you were already spending. The moment you carry a balance, they are a rounding error.
The version you keep doing is the version that works.
Questions readers ask
Is an annual fee card ever worth it?
Only if your actual annual spending, at the card's reward rate, plus benefits you genuinely use, exceeds the fee. Calculate it from last year's statements.
Do rewards affect my credit file?
No. The file records the account, balance and payments. How the issuer rewards spending is irrelevant to it.
