The strategy: To avoid being ripped off by reward credit cards.
Are they likely to rip me off? A study by financial comparison site Mozo found that if you are an average spender, there is every chance you are being ripped off.
It looked at 67 reward-based cards and the net benefits they delivered for someone with an average credit card spend of $16,000. After deducting the annual fee, it found one in five cards charged more for the privilege of having the card than they paid back in rewards.
A third of the cards delivered net rewards worth less than $20, and just five cards provided a benefit of more than $100. While customers are spending more on their cards, the managing director of Mozo, Rohan Gamble, says annual fees have risen from $126 in 2010 to $152 this year, and some providers have reduced the rewards on their standard and gold cards to attract more people onto lucrative platinum cards.
Does that mean I should give up on rewards? Gamble says we have become infatuated with the idea of getting something for nothing, but there is no free lunch when it comes to reward cards. Your rewards are paid for through high levels of spending (and the merchant fees the card issuer gets from that), or fees and interest charged to the consumer. He says if you are a big spender, there is value in having a reward card, but as a general rule you need to spend at least $20,000 on the card each year.
There are, of course, exceptions. Gamble singles out the Qantas American Express Discovery Card, which has no annual fee and delivered $169 of rewards on that average spend. And card fees can vary substantially.
But with the average standard card costing just $44 a year, many average spenders are paying a high price for the meagre rewards they receive.
Gamble says reward cards should be avoided altogether if you don't pay your account balance off in full each month.
The interest charged on reward cards is generally much higher than on standard credit cards, with many reward cards charging interest of about 20 per cent - a level that would more than cancel out any reward benefits.
Gamble says you need to be honest with yourself about reward cards. If your spending habits justify such a card and you pay your account in full each month, a reward card could work for you. He says if you spend more than $50,000 a year, you could even benefit from a platinum card. But for an average spender, or someone who pays interest on their credit card debt, a standard card will generally be better.
How can I tell if the reward card I have is the best one for me? Gamble says you need to look at your lifestyle. If you fly a lot, a frequent flyer-based card may be good value, but he says many people choose frequent-flyer rewards when they would probably be better off with other rewards such as gift vouchers.
While every scheme is different, he says you would need to spend $14,000 to $16,000 to earn a return Sydney-Melbourne flight. As a broad rule of thumb, you get $100 of value for 10,000 points, valuing the flight at $140-$160. Gamble says there are times when it is cheaper to buy the flight and use your rewards for something else.
If you buy regularly from particular merchants, he says cards offering bonus points for spending with partner companies can provide a better deal, but you need to look carefully at your spending habits.
He says offers of 5000 or 10,000 bonus points if you sign up for a card can also be attractive, but you need to remember they are only a one-off. It is more important to find a card that suits your spending habits and the type of rewards you want. Mozo has a handy Rewards Revealer at mozo.com.au.