Play the loyalty card reward scheme game well and you can disprove the theory that there is no such thing as a free lunch. The only problem is that rewards schemes are complicated " it can be difficult to work out which one is offering the most valuable perks and freebies.

There are two types of loyalty card in the UK. First, where your favourite supermarket or retailer offers a rewards scheme, signing up is a no- brainer " it costs you nothing to do so and any rewards you get back are a bonus. Whether to join the second type of rewards scheme " one of 80 or so offered by credit card lenders " is a tougher decision. If you end up paying more in uncompetitive credit charges than you get back in rewards, you'll lose out.

Richard Mason, a director of price comparison service Moneysupermarket.com, says the issue for credit card borrowers is whether they ever pay interest on their bills. 'Those that do not repay their card in full each month will incur interest charges and they should try not to be drawn in by the free perks,' he says.

'For these people, the main concern should be to find a card that allows them to pay as little interest as possible, such as a card with a 0 per cent introductory offer with no transfer fee, or a one with a fixed low standard rate.'

In a way, comparing the cards on offer from different retailers is a pointless exercise. If you shop regularly in Boots, say, you may as well sign up for the chemist chain's rewards card, whether or not you think it is better value than the loyalty card scheme at B&Q, for example.

In contrast, once you've decided to pick a credit card on the basis of its loyalty scheme, comparing what's on offer is crucial. In the case of Nectar, the best-known scheme, there is an overlap with retailers' schemes " around 15 retailers issue points, as does one credit card lender. But that doesn't mean it's the best deal.

In fact, lenders see their loyalty schemes as a key front in the battle for customers. Barclaycard and American Express, two giant credit card lenders are currently trading blows over their schemes " last week, Barclaycard pulled out of the Nectar scheme, claiming that its customers were much keener on offers such as free travel insurance instead. Amex has replaced it at Nectar and insists it is offering a better deal than Barclaycard ever did.

For credit card customers, however, it can be tough to see the wood for the trees.

In most cases, borrowers in a rewards scheme earn points when they spend money, which are then redeemable against particular goods and services. The points you earn and what they will buy you vary from scheme to scheme " sometimes their value even varies within the same scheme depending on what you're buying " so the system is a long way from being transparent. For this reason, Martin Lewis, founder of Internet site moneysavingexpert.- com, says he prefers credit cards that offer cashback to those with loyalty schemes. 'Cold, hard cash is the ultimate flexible points scheme,' he says. 'It can be spent on anything, anywhere so cashback cards that simply return a proportion of your spending as a cash lump sum each year are the benchmark.'

Lewis says it is no coincidence that the best cashback cards, where borrowers can see exactly what they're getting, tend to be better value than more opaque loyalty schemes. 'Any reward scheme that doesn't beat the best cashback cards is an automatic loser,' he argues. 'Just grab the cash and buy the reward with it and you will still be better off.'

Currently, American Express's Blue card is the most generous cashback deal going. It pays up to 2 per cent back of your spending, though this is an introductory offer lasting three months " after which time the rate falls to 1 per cent on spending of more than pounds 2,000 a year. Rival cashback lenders include Abbey, Bank of Ireland, Leeds & Holbeck Building Society and Morgan Stanley. All offer cashback of up to 1 per cent a year.

Morgan Stanley is one lender that has different cards offering cashback rewards. But Patrick Muir, the lender's director of marketing, says its cashback deal is more popular. 'What customers seem to like is the absolute transparency, the very straightforward promise that if they spend a particular sum, they'll definitely get a set sum back,' Muir says. 'People don't always trust big corporations and I think there is sometimes a suspicion about rewards schemes.'

However, in certain circumstances, loyalty schemes can work well. At Nectar, for example, customers spending on their American Express cards in participating retailers such as Sainsbury's, will double up the points they earn.

Brian Sinclair, director of client services at Loyalty Management, the company that runs Nectar, also argues that the scheme is so ubiquitous that its points are almost as easy to spend as cash. 'We reckon 40 per cent of household spending in the UK is in outlets where Nectar points are redeemable,' he says.