 By ASAP Credit Card - Copyright © 2008
Competition
has sparked a variety of changes in the credit card industry. One of the most
popular and profitable additions is the 'reward credit card'. If used properly, reward credit cards provide outstanding perks to cardholders. But for those distracted
by the prize, unreasonable terms and conditions can cost more than the bonuses
themselves. Here are some common pitfalls to avoid:
Beware of High APRs:
Generally,
reward credit cards charge more interest than standard credit cards. With the
typical APR averaging 3% to 5% higher on a reward card, you'll pay more interest
charges over time with one of these offers. But remember, when you earn rewards such
as cash back, points, airline
miles and gas rebates, they can help offset
the higher interest charges. Plus, you'll only pay interest if you carry a balance
month-to-month. Since most credit card issuers offer a grace period - anywhere
from 20 to 30 days - you'll have an opportunity to pay the balance off in full before
any interest accumulates at all.
To prevent high
interest rates from negating the benefits of rewards, avoid making long-term charges
with a reward credit card. Only make purchases you know you can pay off quickly
- within a month or two. To further protect your earnings, it's wise to carry
two credit cards: a card with a low APR for long-term charges, and a card for
short-term purchases which will allow you to earn rewards. This way, you limit
the amount of interest you pay and maximize the amount you earn.
Don't
Overspend to Earn More:
Don't make the mistake
of overspending with a reward credit card just to earn extra bonuses.
It can be very tempting the make all your purchases with your reward card, but
the higher interest charges (discussed above) will eventually catch up with you.
If you don't payoff your balance quickly, the interest will almost always cost
more than the rewards.
Avoid Annual Fees:
One
of the easiest ways to negate the benefits of a reward credit card is accepting
a card with an annual fee. These days most reward cards don't include an annual
fee, but there are a few exceptions you should try to avoid. Do the math and you'll
see why! If you earn 2% cash back, it will take
$2,500 in purchases just to make up a $50 annual fee. Earning 1% (which is standard
for many 'cash back' cards), will take $5000! Always calculate the potential earnings
and compare them against any fees you might be charged. If you can't avoid an
annual fee altogether, only consider a credit card with an annual fee if it has
exceptionally high earnings potential.
Reward Caps
and Expirations:
Many rewards have limits and expirations.
Although some programs are more flexible than others, most points (or miles) will
expire after a specific period of time. Typically, you'll have 36 months to use
points if your account is in good standing. However, if you've been late or missed
any payments you could forfeit your reward points altogether. Also, some institutions
will remove your point balance if you fail to use the card in a 12 month period
or if the account is closed for any reason.
Cardholders
also need to be aware of caps on the their earnings. Many companies will limit
the amount of points or cash that can be earned each month (or year). Depending
on how you use your credit card, this may or may not be an issue. For people who
don't plan on spending a lot, limits may not be important. But if you plan on
maximizing the amount you spend, look for cards with higher caps or no limits
on the rewards you can earn.
* See a complete
list of rewards credit cards >
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