Most of us shouldn't bother with rewards for credit cards

None

It's time to get real about rewards schemes for credit cards.

It's only worth it if you pay off the credit card in full every month. If you don't, the interest charges quickly erode the value of any rewards.

And when I say "worth it", I mean the average spender would come out ahead by a couple of hundred dollars a year.

Rewards cards do add up for high spenders - but again, you need to pay it off in full each month.

If you don't have the discipline, you're far better off going for a debit card with Visa or Mastercard compatibility. If you need a credit card for emergencies or to smooth irregular cash flow, go for a no-frills card with the lowest interest possible.

Australians collectively owe $32 billion on credit cards, an average of $4200 per person, so there's an awful lot of people who shouldn't be chasing rewards.

Be honest with yourself about what type of credit card user you are.

Power users

People who pay a credit card in full every month are free to milk the rewards game. Obviously that doesn't mean spending more than you would otherwise, it means getting the best bang for your buck.

If you're chasing rewards, the latest analysis from comparison site Mozo suggests a standalone American Express card. Keen travellers are in luck as the cards associated with frequent flyer programs represent the best value - particularly Qantas but also Virgin Australia and Jetstar.

???Mozo crunched the numbers last week, after Westpac announced it would no longer issue Amex cards - customers will be offered Amex-issued cards instead. ANZ and NAB ditched Amex cards earlier in the year and Commonwealth Bank is tipped to do the same.

Mozo looked at the "net value" - that is, the value of rewards minus the program's annual fee. A high spender putting $60,000 a year through a credit card could earn a $1193 net value in rewards through the best-performing Amex cards. The highest net value for non-Amex cards based on the same spend is $846.

For an average cardholder who spends $19,000 a year, the highest-performing Amex cards yield $347 in rewards value, compared with $248 for non-Amex cards.

The catch is that Amex is not as widely accepted as Visa and Mastercard, though this might change as Amex is lowering its fees for merchants in a bid to expand its footprint.

In the past 12 months, 45 rewards cards failed to deliver enough reward value to outweigh annual fees at all, Mozo says.

If you're a high spender, you might actually get the best return from a card with a high annual fee. It's more important to look at the earn rate and also the burn rate.

The earn rate is the number of rewards points you earn for each dollar you spend, and this is what most people focus on. But equally important is the burn rate, which refers to how many points you need to spend to redeem a flight or other reward.

Regardless of the reward points, there are benefits from using a credit card. There is greater consumer protection on purchases with a credit rather than debit card. And if you pay it off in full each month, you're effectively making free use of the card provider's money for 30 days.

Renters and people who own their home outright could earn interest on that money through a high-interest savings account, but the best ploy is for homeowners paying off a mortgage. Get your income paid into your offset account, put as many expenses as you can through the credit card, then pay it off in full from your offset account before the due date.

It means you've got your money in your offset account for up to 30 days longer than you would otherwise. Every day a dollar sits in your offset account, it reduces the interest bill for your mortgage.

The average mortgage rate for owner-occupiers is 4.44 per cent, according to comparison site Canstar, and some are paying more than 5 per cent. You generally do better with smaller banks - my home loan rate is 3.83 per cent, for example.

My husband and I use a credit card for the majority of our purchases, from large direct debits to tiny Paywave payments, and we pay it off in full each month. Not only are we not paying interest, but because the cash stays longer in our offset account, we're effectively earning interest of 3.83 per cent for everything we put on credit. Rewards are just the icing on the cake.

Money mortals

If you don't have the cash flow and discipline to pay a credit card in full each month, I'm not judging you - that used to be me. But there's no point kidding yourself about it.

The table shows the best rewards cards are charging annual interest of 20.74 per cent a year, with a couple of decent options at 14.99 per cent a year. But if you forgo rewards schemes, you can get credit cards with interest rates as low as 7.99 per cent a year.

The excellent MoneySmart website from the Australian Securities and Investments Commission has calculators to help you understand credit card interest.

Let's say you have an outstanding balance of $1000 and you make the minimum repayment each month. At a rate of 20.74 per cent, you'd pay $1995 - nearly double - over eight years.

At 14.99 per cent, you'd pay $1578 over about six and a half years. And at 7.99 per cent you'd pay $1220 over about five years.

If you can't clear the balance every month, go for the cheapest card, and focus on trying to live within your means rather than chasing rewards.

A little self-knowledge goes a long way.

Caitlin Fitzsimmons is the editor of Money. Facebook: @caitlinfitzsimmons. Twitter: @niltiac.

This story Most of us shouldn't bother with rewards for credit cards first appeared on The Sydney Morning Herald.