Throughout much of Australia, life has changed significantly over the past six months. From the way we work to the way we play, we’ve seen changes unfold that we wouldn’t have thought possible this time last year. Just look at travel. While those living in Melbourne are kept to a 5km radius of their home, elsewhere in Australia, borders are closed between many of the states and territories, restricting who can travel where.
International travel is also a no-go. With a ban on overseas travel currently in place, those who want to leave Australia must get an exemption from the Department of Home Affairs. Meanwhile, returning Aussies who manage to find a flight home face mandatory 14-day hotel quarantine on arrival, the cost of which comes out of their own pocket.
What does this have to do with your credit card? Quite a lot, actually. Especially if you have a card that earns rewards. For the most part, rewards cards reward big spending, which is something many of us have cut back on during the pandemic. According to a recent survey carried out by J.D. Power, 42% of cardholders surveyed said they are now spending less on their credit card than before the crisis hit.
Certain lockdown restrictions have also resulted in a change in spending patterns. While 27% of survey participants said they were making more online purchases – no surprise there – a further 27% indicated using their card to cover household necessities, and 23% said they were using their card more often to pay household bills. So with travel spending on hold for now, not only are rewards cardholders earning less on their reduced spending, they may also be picking up fewer points on high-earn purchases such as flights and accommodation.
It’s perhaps no surprise then that more than a quarter of cardholders surveyed said they had plans to switch cards. Indeed, around two thirds of Aussie cardholders pay an annual fee, but only one third of those said the value they received from their card outweighed the annual fee they pay. This is especially true for premium cardholders who can no longer utilise the travel perks on offer, which in the past helped to balance out their higher annual fees.
With that in mind then, perhaps this is the time to take stock of your wallet and take a good look at your credit cards. Has COVID changed the way you use your card? Are you making use of its extras and getting value back on your rewards? Are you paying off your balance each month? Or are you paying more than you should in interest and fees?
Let’s find out.
According to the J.D. Power survey, the majority of frequent flyer cardholders hold the wrong card, with the survey highlighting the fact that 63% of those who keep a frequent flyer card in their wallet have spending and usage habits that don’t align with their card’s offerings. So why is that?
Over the past few years, rewards programs across the board have scaled back considerably, lowering points earned per dollar, while increasing the number of points required to redeem rewards. So, while annual fees have remained the same – or increased, in some cases – the value of the rewards on offer has typically decreased, making it harder for cardholders to see true value from their card.
According to recent analysis, the average rewards card’s net value was $126 just five years ago, dropping to $79 in 2019, to then hit an all-time low of $34 in 2020. While scaling back within the world of rewards has a lot to do with that decline, the pandemic is also playing its part. As previously mentioned, we are no longer spending as much on our cards – and we are missing out on higher earn rates typically offered on travel spending.
Aside from earning fewer points, restrictions regarding the way that we can redeem them also work to lower the value of rewards. Historically, the highest return could be found on overseas travel redemptions, either in the form of flights or upgrades. With overseas travel likely off the cards at least until the end of the year, this has led many users to redeem their points elsewhere, only to get a much lower return.
So then, this seems like it would be a good time to look at your rewards card to find out if it still offers value to you.
TIP: Check when your annual fee is due. If you paid your annual fee in recent months, it may be worth keeping your card to get as much out of it as possible. As long as you clear your balance each month, it may be an option to increase your spending to boost your points earn, and then wait for travel to open up to take advantage of higher value rewards. You can then reassess the situation before your annual fee is due next year.
If you find your frequent flyer card is no longer offering value – and you think the change is likely to be permanent – you may want to consider the following options.
Before you close your account, find out what happens to your accumulated points. Some points expire unless you hold a card with the provider, so find out if it’s possible to switch them to another account or convert them to another program. If not, work out how you can get the highest value reward from what’s currently on offer.
Credit cards range widely in their offering. While some options keep it simple, providing only the most basic features, there are many more that go all out on perks. Those perks don’t come for free though. If you want premium extras such as airport lounge access, hotel upgrades and travel credit, you should expect to pay a premium in annual fees.
But that’s not to say they aren’t worth it. As long as you make use of what’s on offer, you may indeed get more value from your card’s extras than you pay out in annual fees. What about now though? Many extras are focused on travel, which as we know, is limited. If you can’t travel, how much value are you really getting on those expensive perks?
What next? Now you’ve assessed your situation, you can choose to keep the card if you think its offering is still of value to you, or you could consider the following.
With businesses failing during lockdown, and unemployment and underemployment on the rise, countless Aussies are now facing financial difficulties as a result of COVID. According to the J.D. Power survey, nearly one in five respondents (19%) said that since the pandemic began, they could not make their minimum monthly credit card payment.
If you are finding it hard to make the minimum payment on your credit card, your first point of call should be to talk to your credit card provider. Explain your situation and find out what options are available. It’s always better to find a solution before the problem gets out of hand, not only in terms of reducing your stress levels, but potentially saving your credit as well.
On the other hand, if you know you can make your minimum repayments, but seem to be carrying a balance more often than not, it could be time to reevaluate your card. This is especially important if you have a card with a high interest rate, such as a rewards card or premium card.
After assessing your current repayment patterns – and the amount you have paid in interest on your balance – you may want to think over the following options.
TIP: If you work on paying down your balance to zero each month, you can take advantage of your card’s interest free days. This feature allows you to pay nothing in interest on your purchases, but you must pay off your closing balance by the due date the previous month to take advantage of it.
Can you get approved for a credit card on JobSeeker or JobKeeper?
Before you think about switching credit cards, it’s a good idea to look at your ability to meet eligibility requirements for a new card. Adhering to responsible lending regulations, card providers need to make sure applicants are able to repay any money they spend on their card before approving them for credit.
That means, if your circumstances have changed since you last applied for a credit card, you may find it harder to get approved if you apply for a new card now. When you apply, the card provider will look at your employment, your income, your debts and your credit report, to determine whether your application will be approved.
Being on JobSeeker or JobKeeper may affect your ability to get approved, but it will largely depend on the card provider in question, and the type of card you are applying for. If you are unsure about any aspect of your eligibility, it’s best to check with the provider before you apply.
If your application is unlikely to get approved, hold off on applying for now. Not only should this help to avoid the hit on your credit (declined credit applications negatively affect your credit score), it could give you time to make yourself a more worthy applicant, either as you pay down debt, build your savings, improve your credit, or find secure employment.
When it comes to keeping a credit card, there are a number of costs to take into account. Not paying off your balance each month will mean you pay out in interest. As for fees, you could be paying out in annual fees, late payment fees, over-limit fees, currency conversion fees, and more, depending on how you use your card.
Obviously you need to think about those costs when working out whether you can afford to keep a card. However, there is also the affordability of spending to consider. If you have a basic, no annual fee card, whether you spend on it or not is no big deal. On the other hand, with a rewards card, you need to spend a certain amount each month to make it worthwhile. So, can you afford that spending?
Taking a closer look at the costs associated with keeping your card in your wallet, you then have the following options to consider:
TIP: Think about what you really need from your credit card at this current point in time. Do you need perks? Or do you need to save money? Are you spending more at overseas retailers and want to pay less in fees for the privilege? Compare your options on CreditCard.com.au to find a card that better matches your needs.
When you have less coming in and you don’t adjust your spending, you may find your credit card balance starting to sneak upwards. The same might apply if you are spending more of your lockdown downtime indulging in online shopping therapy, without considering how it will affect your budget.
However it happened, if your credit card balance is now higher than you would like, this is the time to do something about it.
Now you know where you stand, you can choose which path you want to take to pay down your debt.
TIP: If you opt for a balance transfer, it’s usually a good idea to close the old card account to avoid the temptation to spend on it. This should make it easier for you to focus on paying off your transferred balance within the introductory period.
Disclaimer: The information contained within this post is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Founder of Creditcard.com.au. Roland has extensive knowledge about credit cards in Australia. Known as a credit card expert, he has been featured on tv and in various publications. Some popular offers on our site right now include the ANZ Low Rate. Ever popular with no annual fee first year, low purchase rate and 0% balance transfer. Have a look also at the 0% balance transfer HSBC offer with no annual fee first year.