A study by researcher Mozo shows for most people, credit card loyalty schemes are hardy ever worthwhile.

Marketers’ prey on the fact that we all like to think that we are getting something for nothing. However, among the 119 rewards cards covered, a third of them are hardly worth having, delivering less than $20 in rewards value each year, says Mozo director Kirsty Lamont.

Mozo ranked the reward credit cards assuming that $17,000 a year was spent on the card, which is the typical spend.

And one in four rewards credit cards lose you money each year because the rewards, which can include flight, gift cards and cashbacks, were worth less than the annual fees. “What’s more, some rewards cards have such high annual fees that you need to spend more than $40,000 a year on the card just to break even,” Lamont says.

However, the researcher has identified 34 cards from among the 119 that return more than $100 in rewards, after accounting for fees, each year.

The best card for the typical user delivering an annual net value of almost $300 and no annual fee is the American Express Velocity Escape Card. For big spenders, those spending $60,000 a year, the best card is the NAB Velocity Rewards Premium Card with a net annual rewards value of $1415.

With annual fees as high as $749 and the most generous points schemes reserved for the cards with the highest annual fees, consumers need to choose a rewards card carefully to ensure they get bang for their buck, Lamont says. Rewards cards are a massive industry and many people become obsessed with earning points.

“These points can be wildly overvalued and quickly eaten away by sky-high fees unless you are spending big on your card,” Lamont says. There are other potential traps with rewards card. If the card holder does not pay off the debt, in full, within the interest-free period, the interest rates charged on the outstanding amount is usually much higher than non-rewards cards.

Kirsty Lamont says that the average interest rate on rewards cards is almost 20 per cent compared to an average rate on non-rewards cards of about 14.5 per cent. And the average annual fee is about four times higher at about $160 compared to just over $40 for non-rewards cards.

Those who are not disciplined in their use of credit cards should not be using rewards cards, Lamont says. “If you are paying interest on your card it makes no sense at all to have a rewards card because the cost of the interest will far outweigh any rewards you earn,” she says.

Posted by John Collett – Money Manager (Fairfax) on 27th August, 2014