Worked Examples and Checklists
Cashback vs points vs low-rate card: which comes out ahead? (worked example)
Three illustrative Australian credit cards compared over two years for a cardholder who pays in full and one who carries a balance, with every step of the arithmetic shown.
For someone who pays the full balance every month, a cashback or points card can come out a little ahead of a low-rate card, and which one wins depends mainly on spending level and redemption value. For someone who carries a balance, the low-rate card wins by hundreds of dollars a year in almost every realistic case, because interest dwarfs rewards. In the illustrative example below, a full payer spending $24,000 a year ends up about $284 ahead over two years with a no-fee cashback card and about $88 ahead with a $129-fee points card, compared with a no-fee card without rewards. A cardholder carrying a $4,000 average balance pays about $238 to $434 more over two years on the rewards cards than on the low-rate card, even after counting the rewards.
This guide belongs to the rewards card worked examples. The three cards are illustrative types, not real products.
The three illustrative cards
| Feature | Card A: cashback | Card B: points | Card C: low-rate |
|---|---|---|---|
| Annual fee | $0 | $129 | $59 |
| Purchase rate | 20.99% | 20.99% | 12.99% |
| Rewards | 5% back on the first $2,000 of spending in the first 3 months (max $100), then 0.4% ongoing, capped at $200 a year | 1 point per $1, valued at 0.8c | None |
| Interest-free days | Up to 55 | Up to 55 | Up to 55 |
Person 1: pays in full, spends $24,000 a year
Assume $2,000 a month of eligible spending.
Card A (cashback)
- First 3 months: first $2,000 of spending earns 5% = $100 (the cap).
- Rest of year 1: ongoing 0.4% on the remaining $22,000 = $88.
- Year 2: 0.4% × $24,000 = $96.
- Two-year rewards: $284. Fees: $0. Net: $284.
Card B (points)
- Points: 24,000 a year = 48,000 over two years, valued at 0.8c = $384.
- Allow 10% for expiry or lower-value redemptions: $345.60.
- Fees: $129 × 2 = $258. Net: $87.60.
Card C (low-rate)
- No rewards. Fees: $59 × 2 = $118. Net: −$118.
Against the low-rate card, Card A is ahead by $284 − (−$118) = $402 and Card B by about $206. Against each other, cashback wins here because the no-fee structure beats a $129 fee at this spending level.
Now compare with a no-fee, no-rewards card as the baseline instead of Card C: Card A is $284 ahead and Card B $87.60 ahead. If some of your spending is excluded from cashback or points, both figures shrink.
Person 2: carries a $4,000 average balance
Same spending, but Person 2 pays only part of each statement and carries about $4,000 on average throughout the year. Most cards then also charge interest on new purchases from the purchase date; to keep the example simple, interest is counted only on the average balance.
| Two-year cost | Card A | Card B | Card C |
|---|---|---|---|
| Interest: $4,000 × rate × 2 | $1,679 | $1,679 | $1,039 |
| Annual fees | $0 | $258 | $118 |
| Rewards | −$284 | −$346 | $0 |
| Net cost over two years | $1,395 | $1,591 | $1,157 |
Arithmetic: $4,000 × 20.99% = $839.60 a year, so $1,679.20 over two years; $4,000 × 12.99% = $519.60 a year, so $1,039.20.
The low-rate card is about $238 cheaper than cashback and $434 cheaper than points over two years, even with the rewards counted. Including interest lost on new purchases would widen the gap further. Without rewards in the picture, the interest difference alone is about $640 over two years.
What changes the result
- Higher spending helps points cards with an annual fee, because the fee is fixed and rewards grow with spending. At $50,000 a year, Card B's two-year net (full payer) rises to about $462.
- Better redemptions help points cards. At 1.2c per point, Card B's two-year rewards would be about $518 after the 10% allowance.
- Cashback caps limit cashback cards at higher spending.
- Paying off a balance is the single biggest lever. Clearing the $4,000 with a balance transfer or the payoff calculator plan, then switching to a rewards card, beats keeping a balance on any card.
A quick decision rule
- Have you paid interest on a card in the last 12 months? If yes, start with a low-rate card and a payoff plan.
- If no, estimate your eligible spending. Below the break-even for a fee-paying card (see annual fee vs rewards value), a no-fee cashback or no-fee card is likely better.
- Above break-even, compare cashback and points using a conservative value per point; see valuing frequent flyer points.
Frequently asked questions
Is cashback taxed?
For personal spending, cashback on a credit card is generally treated as a reduction in the price paid rather than income. For business cards the treatment can differ; check with the ATO or a tax adviser.
Why use two years?
Introductory offers and first-year fee discounts distort a one-year comparison. Two years shows the ongoing position more clearly.
Should I keep the low-rate card as a backup?
Keeping a second card adds a limit that lenders count when assessing other credit. If you keep one, choose a low limit.
Can a low-rate card also have rewards?
Some cards combine a moderate rate with small rewards. Run them through the same table.
Sources and where to check
- ASIC Moneysmart — comparing credit cards and credit card calculators
- Federal Register of Legislation — Key Facts Sheet rules
- National Debt Helpline — free financial counselling, 1800 007 007
