Posted by Mike Smith :: September 12, 2008 @ 7:23 amAs its name implies, your rewards credit card will reward you for using it in compliance with the rules of the card. Comparing what you give up to have such a card with what you get in terms of rewards may lead to the conclusion that it’s not worth having.
The standard argument for having a rewards card is that if you’re going to use a credit card anyway, you might as well get something for it. This would be true if your rewards card had the same terms as your other card, but that is rarely the case. In fact, the average interest rate for rewards cards is reported to be more than two percent higher than for non-rewards cards. You are losing money by paying an extra 2% in interest if your rewards are anything less than 2%. The same would be true if an annual fee were to cost you more than the value of your rewards.
Another question to ask about your card is how useable your rewards truly are. While the restrictions of travel rewards cards have improved somewhat, if you have to take less desirable connections, fly at worse times, and be the first passenger to get bumped from an overcrowded flight, is your “free” ticket really worth as much as you think? That’s one of the reasons why I like to take my rewards as cash. At higher point amounts, my cash payout is as good as other rewards (for example $500 cash versus a plane ticket up to $500).
One last point to consider is whether you have your rewards card to earn a prize you have no hope of earning. I recently received a brochure from a rewards card that was showing all of the great items I could redeem 100,000 points for. Everything from big-screen TVs, boats, and snowmobiles, to a 1-year lease on a gas-guzzling Hummer was available at that level. Unfortunately, at the rate I would use the card, I would earn less than 100 points per year with the card. Using a card because of the prizes I could earn in one thousand years probably isn’t the best idea.
One of the few ways to make reward cards worthwhile is to get a card with no annual fee and pay off the balance in full each month. This is the preferred strategy for all credit card use, but can really make a rewards card rewarding. By purchasing as much as possible with my rewards card, while never exceeding what I’ll be able to pay off in full at the end of the month, I earn as many rewards as possible without devaluing those rewards by having to pay a premium interest rate on the balance. If you can use a rewards card in this way, it may be worth it to you as well.
1 Comment
I've never cared about the interest rate on any of my cards because I've never paid any interest on my cards. They can raise it to 99% for all I care. I see no point in paying interest on my day-to-day purchases. Why ever carry a balance? And why consider a card with an annual fee at all?
I charge everything I can on my three rewards cards. One does 5% cashback at grocery stores, gas stations, and drug stores. Another does 3% cashback at restaurants and office supply stores. The last switches what you get 5% cashback on every three months. This totals to over $1000 in tax-free money each year on purchases I would have made anyway. As I said, I pay it all off every month and never pay any interest or fees.
Another advantage to charging everything I can on these cards is that I use a third-party account aggregator to track all of my month to month spending with data directly from the credit cards' websites. I just go to this third-party website and get a pie chart of my spending on groceries vs restaurants vs rent vs everything else. This has helped me know when I need to cut down on eating out, etc.
As long as you use them like you would cash and don't use them to actually borrow, rewards cards are awesome!
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