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 Interest Rates
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 points, cash back, 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 will eventually catch up with you. If you don’t payoff your balance quickly, the interest will almost certainly cost more than the rewards, defeating the entire purpose of using a reward credit card.
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 →