Remember when you signed up for a rewards credit card? That new, shiny piece of plastic was supposed to give you a ton of benefits.
But perhaps your only “reward” has been a dent in your wallet, and you can’t seem to figure out why.
Unfortunately, this scenario is all too familiar. Consumers sign up for rewards credit cards without understanding how they work. Too many cardholders fail to evaluate these cards, and whether the costs outweigh the benefits.
To avoid falling victim to this trap, don’t sign up for a rewards card until you understand the following ways a rewards card can cost you money.
1. It has an annual fee
Some rewards cards have an annual fee. So, determine if you will be able to accumulate enough rewards to absorb the cost.
If not, look for a card that has no annual fee for at least the first year. You might even be able to negotiate with the card company to get this perk.
Even if you obtain a card that offers one fee-free year, it better have something to offer once the introductory period has lapsed. That annual fee will not go away any time soon.
2. It offers discounts that give you an excuse to spend
Many creditors offer discounts on products when you make purchases by using their online marketplace. Saving money can be beneficial, but only if you have adequate cash to cover the items you purchase.
If you plan to finance purchases, you’ll be paying interest on the debt. That is no way to save.
3. It makes you crave spending
Researchers have discovered credit cards do a number on your brain’s reward centers — the same ones affected by drugs like cocaine.
If you use a credit card to buy all your favorite things, it’s small wonder just holding that little piece of plastic can start to give an encouraging thrill. Before long, you might be needing professional help for your credit card debt.
4. Hidden restrictions limit your savings opportunities
Not all rewards programs are created equal. In fact, many have restrictions that limit the amount of points, miles or cash back you can earn.
Also, you may have to meet a minimum spending limit associated with an introductory offer to receive the full benefit. Or, some benefits may expire if not redeemed within a certain period of time.
Blackout dates are also common among airline miles programs, and some creditors wipe out any balance you have accumulated if you miss a payment or close the account.
5. You can’t keep up with rotating categories
Creditors often use a tiered system to calculate the amount of rewards you can accrue each quarter. For example, during one quarter you might save extra on dining out. The next quarter, you might save on travel and gasoline expenditures.
If you do not stay abreast of these changes, you can easily miscalculate earnings or miss out on increasing rewards.
6. Miscellaneous costs bite into the bottom line
Miscellaneous costs associated with rewards credit cards can end up costing you big time. These include dormancy, paper statement and late-payment fees. If you accumulate a $35 fee as a result of a late payment and your standard annual fee is $150, that reduces — and potentially eliminates — the value of any rewards you’ve earned.
7. The annual percentage rate is high
It’s essential to avoid carrying a balance on a rewards credit card. The interest rate on rewards cards is generally higher than on other credit cards, and your interest payments can quickly outpace the benefits.
If you are saddled with a card with a high rate and are trying to dig out of debt, check out “Ask Stacy: How Can I Pay Off High-Interest Credit Cards?”
8. You don’t use the benefits
What good is an airline travel card if you fear flying? If the rewards offered by the card are lucrative but do not appeal to your interests, you might end up not realizing any benefits.
If you need a better rewards card — or another type of credit card — we can help find the best credit card for you.