Check small print as ‘free’ credit card offers may exact a higher price for your loyalty

Published on Friday 14 November 2008 19:37

CREDIT might be in short supply these days but competition for customers remains as fierce as ever. That’s because attracting and retaining credit card customers is more than just about the interest rate or interest-free periods. Lenders also use loyalty schemes, such as discount vouchers, gifts or air-miles, to secure new business and to encourage customers to put new purchases on plastic.

They hope that the promise of “free” gifts will prevent the user from switching to a different, potentially more competitive, lender. On the surface these loyalty schemes might be appealing, but often on closer inspection the rewards aren’t so great.

So before being lured by promise of free treats, you should always check the interest rate offered by a credit card. Cards promising the best loyalty rewards are often those with the higher APRs, which will cost you more if you fail to clear the balance each month.

In fact, failure to clear your balance regularly will mean that any discounts or free gifts you receive will be essentially cancelled out by interest you have accumulated on unpaid debts.

This is where problems occur, as the rewards offered by credit cards usually entail using your plastic to purchase products and services frequently, which increases the likelihood of being unable to pay off the balance each month or simply forgetting to do so. If you miss any repayments you will incur a penalty which will only make your rewards less value for money. In fact, you may have been better off simply buying whatever the reward was with cash than spending on your plastic to get it.

Another problem with loyalty schemes is that they are very difficult to compare on a like-for-like basis. The various points and air-miles credits are worth differing amounts so getting a full picture of how the benefits compare is very difficult. It’s worth considering whether you are really that interested in the types of rewards available – there are many rewards and points schemes that people simply don’t take advantage of.

Rewards schemes are also offered on some store cards, but given the often huge amounts of interest charged on store cards – usually considerably higher than even the highest-charging credit card lenders – any balance left on the card to accrue interest will soon make your 10 per cent discount an increasingly false economy. Reward schemes can be good, but you should never spend on credit cards that you can’t repay just to accumulate enough points for a freebie.

&#149 Ian Wright is managing director of Invocas Business Recovery & Insolvency, part of the Invocas Group, which includes debt advice portal www.newtomorrow.com