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Why a Rewards Credit Card May Be a Bad Idea…
Credit Cards

by - March 26, 2013 - 3 Comments

Rewards cards can be awesome. They give you free stuff just for using your credit card! While this might be true of some rewards cards, not all credit cards will be as rewarding as you may think. In fact, you may end up paying more for some cards than you ever get back in rewards. So, how can you tell if it’s time to put away the rewards card and switch to something cheaper?

Do you carry a balance?

Rewards cards can attract high interest rates. Basically, a card provider needs to make money back on the rewards it gives out. This means rewards cards will usually charge high interest or high annual fees – or both. If you carry a balance on a high interest credit card, you could end up paying more out in interest than you get back in rewards. Pay off your bill each month or look for a rewards card with super-low interest.

Do you spend a lot on your card?

Several studies have shown that unless you are a big spender, you probably won’t be getting much back from your rewards card. You could spend more than $20,000 on your card in a year and still make less than $100 in rewards. So, unless you change the way you use the card, or happen to be a big spender, you may not be getting much back.

Do you need the rewards on the card?

Oddly enough, some people get a rewards credit card just for the sake of earning rewards. They don’t care that they don’t actually need another hairdryer or blender, or an alarm clock that moos, or a set of tea towels in matching colors – they just like getting rewarded. If you are set on having a rewards card, make sure the rewards program is one that you will actually benefit from.

Do you spend just to earn rewards?

Another no-no when it comes to rewards cards is spending just to earn. You know that you can earn a certain amount of points for buying a certain item in a certain store. But really, if you didn’t really need that item and didn’t really want it, was it worth buying it just to earn points? You probably spent more on the item than the value of the points you earned.

Do you need an introductory offer?

Credit card companies want you! And to entice you, they will give you incredible sign-up offers. When it comes to rewards cards, this will usually mean bonus rewards points. Again, this is something to be wary of. Read the small print, as you will often have to spend a certain amount of money, in a certain amount of time, at a certain store, just to get the bonus points. Great – if you were planning on making those purchases anyway, otherwise – a waste of money.

Do you get back more than you pay in?

This is the six million dollar question. In order to find out whether your rewards card is actually rewarding you, you need to work out if you are paying more out than you are getting back in rewards. If not, try using a credit card calculator to see if you can find a cheaper credit card that saves you money.

Good luck Penny Hoarders!

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  • http://www.krantcents.com krantcents

    I have had an airline credit card for roughly 20 years and earned enough frequent flier miles to fly overseas business or first class every other year. There are a number of ways to get the extra miles to reach those thresholds. The fees total between $1-2,000 for 20+ years and I probably had about 10 pairs of tickets.

  • Bobby Tarumi

    Reward cards can definitely make you spend just-because of the rewards points. It’s just temptation.

    What’s worse is that now days, credit card companies seem more hesitant to give you your reward too; for one card as an example, I had to wait 2 months for my little 30 cent cash back to show up on my account! And as well know, we can’t even use that reward unless we have a minimum amount (e.g. $25-$50) in rewards. Now I have $22 worth of rewards stuck in my account -earned from risky large purchases- and I can’t touch it. It’s a definitely a case of ‘if it’s too good to be true, it usually is’ -.-

  • http://moneyaches.com Jennifer @ Money Aches

    For myself I’ve choosen the easy route and found a card that gives me a percent back on my purchases each month. It’s only 2% back but it is so simple to use and no fees that for me it is worth it. I use this card as my ‘debit’ card. In other words if I don’t have the money in my account I can’t use the card as it is paid off in full each month. This certainly wouldn’t work if I didn’t create a budget each month and know ahead of time what I had to spend.

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