Most financial institutions don't want to compete on price. They prefer to compete on bells and whistles to keep their revenue from their products as high as possible.
Marketing departments know that everyone likes the feeling that they are getting something for nothing. And nowhere is that exploited as much as with the credit card rewards programs.
![Peter Cakarnis, 60, has seen the value of his credit card rewards diminish over time.](/web/20170416165710im_/http://www.theage.com.au/content/dam/images/g/v/j/q/x/8/image.related.articleLeadwide.620x349.gvk3e1.png/1492249754472.jpg)
Rewards used to be much better value, but research from comparison site Mozo shows that rewards cardholders now need to spend nearly $20,000 a year to earn a measly $100 gift card.
It should prompt anyone with a rewards card to think hard about the value they are getting, especially as the annual fees and interest rates are generally higher on rewards cards than on non-rewards cards.
The value of rewards for each dollar spent on credit cards has been declining for years, but it has taken a turn for the worse over the past year.
Typically, for each dollar spent the reward is worth about half a cent.
And for that you will pay an annual fee on the card of typically $177, more than four times the average non-rewards card fee.
Fees on rewards cards can be as high as $750.
Close to two-thirds of 1600 rewards card holders told a survey by comparison site Mozo that they would ditch their rewards card if the value dropped further.
Rewards value questioned
Peter Cakarnis has a platinum rewards card with a major bank.
He says the rewards program used to be good but the value of the rewards has diminished over the 20 years he has had the card.
"The rewards card is giving me less, yet the annual fee has increased from about $90 to about $150 now," he says.
"I've asked my bank if they can waive the fee because we are a long-term customers with a number of products, but the bank says it is one thing that it will not waive," Cakarnis says.
The 60-year-old supply-chain consultant says he is one of those "rusted on" customers of a big bank but he has taken out a vanilla card with no annual fee with another bank that he is using more.
"If we have a big item my wife will say put it on the card to pick up points, but I am saying to her what do we get out of it," Cakarnis says.
"We have Qantas frequent flyer rewards points, but it's getting more difficult to get a seat when you want it. You go and book the flight and they say it is not available, they only have those horrible early or late flights when they have capacity."
Two-thirds of rewards cardholders told the Mozo survey they don't spend enough in a year to earn even a $100 gift card.
Kirsty Lamont, a Mozo director, says the the value of rewards cards has rapidly declined over the past couple of years with cardholders now having to spend $1789 more than they did two years ago to earn a $100 gift card.
Three out of four people have at least once one rewards credit card, yet half of those with rewards cards say the rewards are poor value.
Most of the rewards credit cardholders who were surveyed say it takes too long to earn enough points for a worthwhile reward.
Lamont says you probably need to spend more like $40,000 a year to get value from rewards cards, and that's provided you always pay off the debt in full each month.
If you don't pay off the debt you pay an interest rate on purchases of 19.78 per cent, on average, compared with 14.1 per cent for non-rewards cards.
There are "vanilla" cards with purchase rates at low as 9 per cent for those who have revolving debt on their cards and want to keep the amount they pay in interest to a minimum.
Zero-interest transfers
Lenders are promoting their zero-interest balance transfer offers, which means there is no interest on the transferred credit card debt for a period of time.
You can even get a zero-interest balance transfer card that offers rewards points but these have higher fees and interest rates than those that don't offer rewards.
Balance-transfer fees are usually up to 3 per cent of the transfer amount and annual fees can be up to $400 for non-rewards cards and $750 for rewards cards.
But people who continually struggle to pay off their credit card debts could be better off with a "vanilla" card with a low-interest rate or even a personal loan where there is a fixed schedule of repayments.
Abigail Koch, a spokesperson for comparison site Compare The Market, says it is important to be aware of the length of the interest-free period on transfers, which typically ranges from six to 24 months.
The "revert" rate that kicks in when the interest-free period is up can sometimes be equal to the cash withdrawal rate, which can be more than 20 per cent. The interest-free period is usually only for the transfer balance, and interest is usually charged on any purchases on the card.
Interchange fees
One of the reasons that the banks are offering less value on their rewards cards is that the "interchange" fees that help fund rewards programs are coming down.
The Reserve Bank's reforms to credit card and debit card interchange fees come into effect on July 1 and will reduce the revenue that banks earn from the fees.
Merchants tend to have single pricing regardless of the payment method, whether credit card, debit card, eftpos or cash, which means prices are inflated for all of the merchant's customers, regardless of payment method.
Some merchants will have a surcharge for customers paying by card, which must be flagged to the cardholder.
Banks have already started dropping their rewards earn rates in anticipation of lower interchange fees.
Mitchell Watson, the research manager of comparison site Canstar, says the way to assess if your rewards card is worth it is to work out the net benefit.
"That depends on the annual fee on the card, how much you spend and how much you get back," he says.
"The rule of thumb is if you have revolving debt on a credit card then a rewards card is not for you," Watson says.
"Those spending less than $20,000 a year really have to make a considered choice on whether the rewards are worth it," he says.
Watson points out that premium cards can have other features besides rewards points that can be attractive to some cardholders.
For example, high-end cards tend to come with extended warranty on purchases, which typically extends the manufacturer's Australian warranty by up to 12 months.
Among other features, they typically have more comprehensive travel insurance that may be valuable to frequent flyers.