Rewards credit cards are usually marketed as a good way to get rewards like cash back or airline and travel miles. However, what most of the 80 million Americans who currently have a rewards card do not understand is that these cards come with negatives, like higher interest rates, additional fees, and sometimes a cap on the amount of points you can receive.
Because of these hidden downsides, you can actually end up paying more for your purchases than a regular card, unless you pay your bill in full every month.
With that as a basis, there are good cards out there, but it is imperative that you read the terms and conditions, and pick a card that provides rewards that are actually a bonus, and not something you pay for in interest.
To give an example, Howard Dvorkin writes that:
“Consider a cash back rewards credit card: You typically get around 1% to 5% cash back from various purchases. So let’s say you spend $5,000 on your 15% APR credit card in a year and get a generous 5% cask back on all purchases. That gives you $250 at the end of the year. However, if you pay only the minimum payment on your credit card, you end up paying more than $5,000 in interest before you pay your debt back. Even if you pay fixed payments of $475 per month to pay the debt back in a year, you pay just over $395 in interest. So in 12 months, you earned $250 and spent $395 in interest—creating a net loss of $145.”
He goes on to say that even with rewards cards where points are involved, the closer a person gets to reaching a milestone, the more they will likely spend to get there. This is called “purchase acceleration,” and will likely end up with the individual spending more money than they intend to, just to get a few extra points.
The most important things to remember when looking to get a rewards card are to read the terms and conditions, to make sure they do not meet a “points cap,” and to pay off your debt before any interest accrues. If you have already spent too much, work as fast as possible to get rid of that debt, as rewards credit cards tend to have a higher interest rate.
Check out more tips for good use of rewards credit cards: