Why credit card points aren't actually worth the money

Research consistently shows that, for 90% of us, personal credit card maths simply doesn't add up - even if you're paying your card off in full every month with the aim of collecting credit card points.

If you pay everything on credit cards, you're going to be spending, on average, 18% more than you would if you using the cash in your bank account, according to research conducted by Dunn and Bradstreet.

The ABS says the average household spends $32,500 per year on credit cards. If we apply the 18%, this means you'll overspend by almost $5000 every year.

And if you don't pay your card off in full each month, you're also being whacked with interest. That could equal almost 40% extra.

From overspending to investing

Imagine what that money could become if you didn't overspend and invested it instead.

If we assume you spend the average $32,500 per year according to the ABS, this would equal $2708 per month.

The overspend on your card, therefore, would be $487 per month (18%).

If you didn't use a personal credit card and invested that overspend instead, in 12 months you would have $6063 invested.

If you continue that investing habit, at the end of five years, you would have $35,783 invested (invested at a very conservative 8% p.a.)

Continue that great investing habit for 10 years and you would have $89,095 invested.

Yep, that's right. Simply by ditching the personal credit card and investing the amount that you would potentially be overspending, you could end up with almost $90,000 invested at the end of 10 years.

Earning credit card points

Then there is the issue of credit card points.

Now I get it. Everyone likes getting stuff for free - me included.

But have you ever thought about what it's costing you to earn those points and if those points are even worth it?

Remember, we're applying this to personal credit cards only. If you use a credit card for business and pay your card in full, then cards can be worth it. (Most people aren't overspending at Officeworks or the tax office.)

Let's do the maths together. I picked one of the current best-performing points cards - the Westpac personal credit card Altitude Black (we chose this example card using a comparison site):

This credit card earns 1.25 points for every dollar you spend and has an annual fee of $295.

Sticking with the average spend on credit cards for Australian households, if you spend $32,500 per year on this card, this would equate to 40,625 points

If you convert these points to gift cards, you get a gift card worth $190. So yes, you get a 'free' gift card to the value of $190, but after you take into account the annual card fee of $295, you are $105 worse off.

But let's boost the points and assume that you'll spend some money at places that give you bonus points and you rack up an impressive 150,000 worth of points. The reward value is now $700, less the annual fee equals $405 in gift cards or a couple of domestic flights.

That's not bad, right? Wrong.

Next, we need to add into the equation that you're overspending by an average of $5850 per year. This means you are behind more than $5,00 in both cases.

Instead, you could ditch the credit card, save the annual card fee of $295, prevent potential overspending of $5850, still spend $405 so you don't feel like you are missing out from that 'free' gift card or domestic flights and be able to invest $5445 each year, which would end up being more than $80,000 in 10 years!

Now I am not saying no-one should have a personal credit card. There's probably 10% of us who are super disciplined who can.

What I am saying is that you need to be aware of the potential pitfalls when using a credit card. Or to put it another way, as my grandma used to say, 'there's no such thing as a free lunch'.

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