Cash or gifts for doing nothing, that's the big appeal of reward credit cards. Basically, the more you spend using the cards the more points you earn and this in turn can bring you gift rewards or simply cash back. The concept has been around for years – first pioneered by American Express – but since the onset of the credit crunch the idea has increasingly caught on with all manner of providers now marketing their reward credit cards.
But reward cards come with a big potential sting in the tail and that is the interest that can accrue if you forget to pay off your balance each month. Just a single month's worth of interest could more than outweigh the value of the reward or cashback you earn.
As for earning cash or gift rewards some lenders make it a proviso that you use the card at certain retailers or even energy companies in order to scoop the reward.
What to look out for
There are real advantages to having a reward credit card. Some, if used correctly will earn you hundreds a year. It's quite simple, if you spend on the card you will earn money and it will cost you nothing.
Sounds like a good idea right? Well what many fail to realise is that these cards only reward diligent consumers. Taking advantage requires disciplined spending. Credit card providers are banking on enough customers failing to repay what they spend each month so that they can levy interest which can top 20 per cent APR. What's more, if you use the card to withdraw cash from ATMs you can be hit with a one off fee as well as a higher rate of interest than is levied on standard purchases.
Nevertheless, if you're savvy, you could actually earn money from spending on your credit card. The American Express Platinum Cashback Credit Card is the market leader in this area. By using the card carefully, you could earn yourself as much as £100 in the initial three months.
Frequent flyers could find reward credit cards an effective way to earn themselves some extra points. With a Virgin Atlantic Black Card you could earn 6,000 Flying Club Miles with your first purchase. Because the card comes with a whopping 37.1 per cent APR, you would need to be diligent about paying it off each month. What often isn't advertised with travel cards is that lenders can strip away rewards for a number of reasons and there may be hidden fees. You may also face some restrictions when using your bonus miles. This can include anything from seat restrictions and blackout dates to exclusions on where you can fly. Check flight availability before you book a hotel.
Want unlimited money off your BT bill? The BT Credit Card offers customers a penny off for every £1.50 they spend.
Although most people associate the AA with car insurance and breakdown cover, it also offers a credit card with some attractive benefits for drivers. On top of rewards for everyday spending, you will receive double points if you use the card for motoring, fuel and AA goods. Your points can be redeemed against items such as driving essentials and shopping vouchers. What's more, AA members receive twice as many points as non members.
Fans of cashback websites might be interested in the Egg Credit Card. Partnered with Quidco, the card allows you to earn cashback when you shop at any one of 1,500 online retailers. At present, deals include cash back of 5 per cent on an iPad from the Apple Store.
Tesco is making waves in the card market with it's Clubcard Credit Card. In addition to earning Clubcard points for your credit card spending, the card comes with a market leading 13-month interest free period on new purchases.
But if you like the simplicity of receiving cash for each pound you spend then Capital One will give you 1 per cent on whatever you put on the card. Whereas, the pioneers of reward credit cards American Express offers a cashback rate of 5 per cent on the first three months of the card's life up to a spend of £2,000 and then between 0.5 and 1.25 per cent depending on how much you subsequently spend.