Paying for the privilege

Loyalty cards may cost more than you realise

Nativity cards from Uncle Roy and Auntie Hazel are plopping through the letter box, Santa is waiting for customers in his grotto, plaintive carol singers accost you in the street - and the kids want a mountain bike each. And a new Sony play station, please. And what about all the food and drinks? Merry Christmas, it's that time of year again.

A time when, like it or not, plastic cards are repeatedly used in the search for a few hours' happiness. Despite all the new year's resolutions in the world, it is virtually impossible to get through the holiday season without adding hundreds of pounds to our debts.

At such times, resigned users can comfort themselves with the knowledge that, by using the right card, they are at least ensuring a small extra bonus out of it. Credit card companies know this. That is why they spend vast amounts of time devising the right type of loyalty package, aimed at ensuring that it is their plastic friend we use and no-one else's.

A study by Steve Worthington, a professor at Staffordshire University, details the incredible effort that card issuers go to to ensure we spend money through them alone. In the past 20 months more than 20 million supermarket cards have been issued by the biggest chains,while 13 million people have petrol loyalty cards. Of the 30 million credit cards in circulation, 55 per cent are linked to loyalty programmes.

The purpose of loyalty cards is to prevent us from shopping around and bring to an end our car-engendered "promiscuity" with several stores or payment methods. Research shows that "loyal" shoppers spend twice as much as "promiscuous" ones, while in the grocery sector, loyalists have larger budgets and their sprees are up to four times greater than their pickier counterparts.

"Companies are [therefore] developing schemes that are no longer mere add-ons to card-based programmes," Professor Worthington says. "If a card-based loyalty programme does not offer significant personal gain for the consumer, it will lose `wallet share'."

The use of cards also allows suppliers to build a detailed profile of customer likes and dislikes, allowing them to tailor their products.

According to Professor Worthington, this in turn allows customers to become more aware of their value to suppliers and they expect to be rewarded for their patronage. "Loyalty is a two-way street and information and rewards must flow both ways to allow the relationship to thrive," Professor Worthington says.

The key question is: how do we use our new-found consumer power to best effect? The study, sponsored by The GM Card, linked to the car manufacturer, offers some tips.

First, before deciding on rewards, customers should be certain they know what the costs of a scheme actually are, most importantly, the interest rate. Some payment cards will have fees attached to them, while others offer no interest-free period. If you roll up debt on your card, this is not a problem. If you are a prompt payer, it is.

Second, where rewards are being considered, customers need to decide whether they want to redeem their points only through the issuer or whether they prefer a third-party alternative. For instance, Tesco Clubcard points can only be redeemed through the store. Shell's Smartcard scheme allows redemption at John Menzies and conversion of points into Air Miles.

Remember also that there may be special offers. Contrary to claims made by The GM Card, it is possible to obtain greater discounts through special offers with Trustcard than simply looking at the points system. On a pounds 3,000 spend, Barclaycard offers pounds 150 off a Ford, compared to pounds 90 with Vauxhall's GM Card.

Also, it helps to decide whether you want a wide choice of rewards. With The GM Card, there is one: a hefty discount on new Vauxhall cars but nothing else. Barclaycard not only offers reductions on Fords, but a large range of other gifts. Goldfish, the new card launched by British Gas, not only helps cut your gas bill, it also cuts your Asda shopping bill.

Professor Worthington points out that loyalty programmes need not be mutually exclusive and it is possible to divide one's support between, say, petrol and grocery cards.

"Consumers are also double-dipping," he says. "This means they double the value of their rewards by using both a payment and a non-payment card in tandem. Thus, buying at a supermarket or petrol station, the double- dipper uses the supplier's loyalty card to gain rewards based on his or her patronage whilst at the same time using a payment card that offers double rewards."

Professor Worthington believes that loyalty cards are here to stay because they replicate the one-to-one relationship we once enjoyed with our local shopkeeper, who knew us individually and treated us accordingly.

Large organisations use the knowledge they gain of our spending habits to target us with what they believe we will want. Of course, this depends on whether we want to play their game.

Take Professor Worthington's first piece of advice - that of getting the best APR deal for our money. It is well-known to a discerning minority of customers that the cheapest credit comes not from the large card issuers, such as Barclaycard, NatWest or even TSB. One of the best APR rates comes from Royal Bank of Scotland, which charges 14.5 per cent on its MasterCard. Alternatively, Robert Fleming/Save & Prosper has the base rate-linked card, which is pegged at 5 points above base rates, giving an APR of 11 per cent. The bank's Visa and MasterCards charge 14.6 per cent, but there is a pounds 12 annual fee.

When you consider that at best, the likely benefit from a loyalty programme is 3 per cent of total spend, it makes sense to find the cheapest APR rather than pay 19 per cent or moreto get the toaster or cuddly toy you wanted.

Of course, there is always the nuclear option - it might just be possible to heed that new year's resolution and refuse to take part in the spending madness. You may be a lot better off for it, both spiritually and financially.