Credit Cards

Credit Card Rewards

Historically, after the Great Depression notably, financial institutions could not make as much money from mortgages and shifted more focus towards credit cards for income. To incentivise people to sign up and continue using their credit cards, these financial institutions would create rewards programs and generous sign-up bonuses. There are many kinds of rewards that might be offered:

• Travel points.
• Car insurance, travel delay insurance, etc.
• Cashback. How do Credit Card issuers make money to fund rewards programs?
• Interest
• Card fees.
• Interchange fees (a.k.a. Swipe fees). These are fees paid by the merchants you buy goods/services from, not by you! Roughly, those fees are 1-3% of each transaction (but you, of course, don’t notice because they’re not paid by you).
  • Why do some stores accept paying upwards of 3% interchange fees? Because they may lose out on many customers as a result.
  • Stores, especially smaller ones, may increase their prices by 1-3% to pass the fees along to consumers. This is the source of some ethical concerns because this creates a system that punishes people who do not use premium cards, like lower class people. Companies offering great rewards programs often charge higher interest, card fees, and higher interchange fees for merchants to fund those programs. Credit card issuers make a lot of money from irresponsible consumers. So long as you pay cards off each month and are aware of fees associated with holding the card, you can exploit the rewards programs.

Credit Score

Your credit card activity gets reported to credit bureaus like Equifax who will calculate your credit score. This credit score gets shared with other financial institutions, so your spending/repayment behaviour with American Express affects your mortgage loans with ING, and so on. Events that affect your credit score:

• Making late repayments reduces your credit score.
• Closing the card will increase your credit score (in Australia at least).

Your credit score is mostly dependent on:

1. Payment history (have you always paid on-time?)
2. Amounts owed
3. Length of history (how long you’ve held the credit card)

Always pay on time, don’t utilise more than 30% of your total.

Credit Card Churning

There are many credit cards to choose from:

• HSBC.
• Westpac.
• Suncorp.
• American Express. Here are some considerations:
• Annual fees.
• Sign-up bonuses.
• If aiming to get travel rewards, then different banks have different airlines they have partnerships with. How to meet the spend goal:
• Use that one card for all your normal transactions.
• Pay for your friends and family’s transactions, then get them to pay you back.
• Buy gift cards, which have the added benefit of giving you a small discount for larger gift cards. Generally, you can churn credit cards once a quarter. Some additional notes:
• Credit card churning is not illegal, although it may violate the terms and conditions of some issuers who then reserve the right to revoke your rewards.
• The ATO does not consider cashback from financial institutions as taxable income.
• Often the main rewards are from the sign-up bonuses, not ongoing spending in the long-term. Useful resources:
• https://www.rwrds.com.au/
• https://www.pointhacks.com.au/tools-calculators/credit-cards-master-table/