Understanding the Disadvantages of Credit Card Rewards
Credit card rewards can be enticing. The idea of earning cash back, points, or miles simply by making purchases is appealing to many consumers. However, there is a hidden cost that credit card companies often fail to mention, and it could end up costing you more than the rewards are worth. In this article, we will explore the downsides of credit card rewards and provide you with valuable insights to help you make informed decisions.
One of the major disadvantages of credit card rewards is the potential cost. Credit cards allow you to carry revolving debt, meaning you can withdraw, repay, and then withdraw again. There are three types of revolving debt: heavy revolvers, light revolvers, and transactors. Heavy revolvers carry balances over to the next month continually, while light revolvers sometimes carry a balance over to the next month. Transactors, on the other hand, never carry balances over to the next month.
According to the Federal Reserve, heavy revolvers in the United States had a total consumer debt of $1.31 trillion as of December 2023. By the end of 2023, 49 percent of Americans had become debt revolvers, up from 39 percent in 2021. Shockingly, 84 percent of these heavy revolvers have a rewards credit card, with over 47 percent of them using credit cards solely to earn points.
However, the average reward credit card for rewards points charges an interest rate ranging from 20.24 percent to 29.0 percent, and annual fees can range from $95 to $500. This means that the majority of heavy revolvers are unlikely to earn enough points, miles, or cash back to offset the monthly interest they pay. In essence, they end up losing money rather than being rewarded.
To determine whether a rewards credit card is worth it for you, it is essential to analyze your spending habits. Consider how you use your credit cards. If you frequently use your miles to take big trips but don’t pay off the trip immediately on the credit card, you negate the savings. On the other hand, if you use your credit card for day-to-day expenses such as gas and groceries and consistently pay off the balance at the end of each month, a rewards card may be a suitable choice. By avoiding accumulating debt and losing points to high interest rates, you can effectively benefit from the rewards.
When comparing credit cards, it is crucial to look beyond the rewards and consider the interest rates and annual fees. Credit card companies can afford to offer rewards by charging higher interest rates and annual fees. If you carry a balance into the next month, these costs can quickly eat into any rewards you earn. Ideally, find a rewards credit card that offers an introductory zero percent interest rate for the first few months. This way, you can accumulate points without paying interest.
For those who frequently travel, it is worth checking if a rewards credit card offers transferable points to travel partners. This provides flexibility and can often result in better value when redeeming points with airlines or hotels. However, it is essential to carefully read the fine print to avoid any potential pitfalls that could lead to financial losses.
Different credit cards offer various types of rewards programs. Some use tiered rewards points, meaning different categories earn different point values. For example, travel may earn you $5 per point while gas may only bring you $3 per point. Analyzing your spending habits will help you choose a card that aligns with your needs and maximizes your rewards potential.
Another factor to consider is the expiration of credit card rewards. Many reward programs come with expiration dates and conditions. Inactive accounts may result in losing accumulated points, and having an account in poor standing can lead to the removal or loss of rewards. Additionally, returning a purchase can result in the loss of rewards. To avoid losing your hard-earned rewards, read the fine print and understand the expiration policies of the credit card you choose.
Not all credit cards with rewards are worth pursuing. It is crucial to avoid high-interest rate cards, as the interest paid will negate any benefits from the rewards. A significant annual fee can also diminish the value of rewards earned. Furthermore, be cautious of reward points that can only be used with specific partners. These limitations may restrict your ability to use your points effectively and result in wasted rewards. Lastly, steer clear of cards with complicated redemption schemes that make it difficult to understand how to use your points effectively.
In conclusion, credit card rewards can be a valuable benefit if used wisely. However, whether they are worth it depends on your lifestyle and financial habits. If you consistently carry a balance and take several months to pay it off, the interest paid will outweigh the value of the rewards. On the other hand, if you pay off your credit card monthly and avoid high-interest rates and annual fees, rewards can be a valuable tool to save money. Analyzing your spending habits, comparing credit cards, and understanding the terms and conditions are essential steps in maximizing the benefits of credit card rewards.
Please note that this article is for general informational purposes only and should not be construed as financial advice. It is always recommended to consult with a financial professional before making any decisions related to credit cards or personal finances.
