Beware of The Rewards Credit Card
Rewards credit cards are everywhere. All major credit card providers have at least one type of rewards card to offer their clients and the majority of them have several. It’s more than likely that if you’re an adult and use credit, you have a rewards card and rightly so. Rewards cards are a great option for most consumers, if you’re going to use a credit card to purchase gas and groceries, or to pay for monthly bills, you might as well earn something for all the money you’re spending.
What’s the Catch?
On the surface, rewards credit cards seem fool proof. All you have to do is charge purchases that you would normally make to a credit card that gives you some form of reward. Typically, it’s money back, points that can be redeemed for certain products, Air Miles, or Aeroplan points. But when you start applying for too many cards and charging things you can’t afford to pay for with cash, you open yourself up to serious debt issues.
Let’s take a look at a few of the issues that can be created when rewards credit cards aren’t managed carefully.
Opening too Many Credit Cards That You Don’t Need
Credit card companies like to sell you ideal scenarios along with their rewards cards. Travel more, be rewarded for your spending, and gain access to new deals and products. All of this is great and if you do in fact travel a lot, a credit card that rewards you with Air Miles or Aeroplan points is definitely a great option. But, if you never travel, you’re simply being persuaded into opening a credit you don’t need.
Furthermore, opening too many credit cards, all within a short period of time, can have a negative effect on your credit score. Every time you apply for a credit card, the provider will perform a credit check. This type of credit check is a hard pull or a hard inquiry (click here to learn more about credit inquiries), this means that your credit score will go down a few points and the credit check will remain on your credit report for up to two years. So if you apply for several rewards credit cards all within a few weeks of months, you’re credit score will decrease every time the credit card provider checks your credit.
It’s important to note that this may not be that big of an issue for many consumers. But, for those who are looking to apply for a mortgage or large loan, several consecutive credit checks may hinder your ability to get approved.
Interested in learning more about your credit score? Check this out.
Spending Money You Don’t Have, to Collect More Points
Rewards credit cards can provide you with the perfect excuse to spend money you don’t have just to collect extra points. The temptation to over spend just to accumulate points to take a trip you might never plan or for a set of pots and pans you don’t need will be very strong.
The best plan of action you can have when it comes to using rewards credit cards is to not change your spending habits. Charge whatever you normally would, whether it’s groceries, gas, or your utility bills. Don’t start shopping more frequently just to collect more points.
What is Credit Card Churning? Read this article.
High Interest Rates and Yearly Fees
Because of the nature of rewards credit cards, they are not free and they are not cheap. This is probably one of the largest misconceptions that people have about rewards cards. The issuers of these cards want us to believe that we really are getting something for free, simply for charging a purchase instead of paying for it with cash.
The problem is rewards cards often have higher interest rates and almost always come with yearly fees. This means that if you fall into the trap of charging a purchase you can’t afford and are unable to pay off your credit card in full, you’ll not only be paying for the item, you’ll be paying a higher interest rate, and a yearly fee. Thus if you don’t clear your credit card’s balance at the end of every payment period, the items you purchase will start to become very expensive.
Forgetting to Use All the Points You Collected
One of the most unfortunate things that you could do with a rewards credit card is to forget to redeem the points you’ve worked to diligently to collect. If you’ve decided to charge more just to collect more points you should have a plan for those points.
Rewards credit cards are great, but they need to be used responsibly to truly take advantage of the rewards. Consider your options, your lifestyle, and your spending habits before you apply for too many credit cards simply to collection points.