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How credit card reward programs work

There are three basic parts

1. Spend money, earn points
2. Sign up points bonus
3. Redeem gift cards with your points

When you spend money on a credit card with a reward program, you earn points for each dollar you spend. The rate you earn points depends on the card - it might be 1 point per dollar, 2 points or 1/2 a point.

Most credit cards with reward programs also give you a sign up bonus of some large number of points - think 100,000 points.

Each credit card provider has their own reward program, and you can use this to redeem your points for goods or gift cards. All the dollar values on this site are the values of Woolworths or Coles gift cards redeemed with points. The point requirement is different in each program. Generally, using Qantas points for gift cards is worse than using the banks own reward program.

Each credit card comes with an annual fee. Often credit cards will wave the annual fee for the first year. I generally don't keep a card longer than a year, to avoid the second year annual fee. Some credit cards split their bonus points over two years, e.g. 80k the first year, and 20k the second year. This means you have to pay two annual fees. Sometimes its worth it, sometimes its not.

What is credit card churning?

Credit card churning is where you move between different credit cards, signing up to earn the sign up bonuses.

Credit card churning has 4 steps

1. Sign up for a new credit card
2. Spend the spend requirement to earn the sign up bonus
3. Redeem the sign up bonus for gift cards
4. Cancel the card
5. Repeat from step 1.

Each Bank/provider generally has a period you have to wait, before you can sign up again and be eligible for another sign up bonus. The period is normally 12 months, but for some its 18 months (like AMEX).

This means, if you signed up for an credit card card on Jan 1st, earned the bonus within 3 months and cancelled it, you could be eligible to sign up again, and earn another signup bonus by April the next year.

Scoring

All the cards are graded on a curve on four categories:

• Churn Score - the overall performance of the card, factoring in all the factors below.
• First Year Annual Fee Score - how high the first year annual fee is. The annual fee often goes up the second year, so I always churn away before paying that fee.
• Bonus Value Score - how much gift card credit you will end up with after you: pay the first year annual fee, meet the spend requirement, earn the bonus points and the points you gained from reaching the spend requirements, and then redeem it for gift cards from the card's reward program.
• Bonus Difficulty Score - how hard it is to reach the requirements to earn the bonus - often spend $X in Y days.
• Earn Score - how easy it is to earn another gift card, after you earn the bonus. Some cards, you earn 2 points per dollar, some cards, have cheaper points for gift cards.

Will this affect my credit rating?

Yes, credit card enquires do affect your credit score - it's more a question of the amount. There are three different credit score providers in Australia: Illion, Equifax and Experian. Find out more from the gov. Since I started credit card churning for a few years, my credit score has dropped from "excellent" to "very good", which I am fine with. I monitor my credit score with these three services:

• Creditsimple (Illion)
• Getcreditscore (Equifax)
• Creditsavvy (Experian)