Credit card issuers are using rewards programs as an incentive to get people to apply for their cards. On the surface, rewards cards seem like a good deal. After all, if you are going to use credit cards anyway, why not get something extra in return? You can get redeemable points, cash backs, or even airline miles.
Unfortunately, rewards cards also come with serious pitfalls if they are not managed properly. You may even end up much deeper in debt by using these cards.
Earning Rewards Should Not Be a Reason to Spend
One of the main pitfalls of rewards cards is that they encourage you to spend more than you should. For instance, let’s say that you have a card that gives you 45,000 miles for every $1,000 that you charge on the card. If you have already charged $800, you may be tempted to charge another $200 simply to get the points, even if you don’t actually need to make these purchases.
You should always keep in mind that rewards should be a by-product of your spending. You should never spend simply to get rewards.
You May Ultimately End Up Paying More
One of the biggest misconceptions about rewards cards is that you are getting something for nothing. But credit card issuers are using these cards to make more money. They do this by charging higher interest rates and annual fees.
If you are responsible in managing your credit and are able to pay off your balance before the end of the billing period, then the higher rates may not be an issue for you. But if you are the type who can only pay off part of their balance, or even make just the minimum payment, then these higher rates may ultimately cost you more than the rewards that you earn in the long run. These interest charges are added on top of the hundreds of dollars you have to pay every year to keep the card active.
Even if the rewards card initially comes with low interest rates, these are not fixed and will go up in time. You have to read the terms and conditions of the card before you activate it.
Credit Cards Ultimately Encourage You to Spend More
One of the biggest inherent pitfalls of credit cards is that it encourages the habit of impulse buying. If you see something you want, but you don’t have enough money in your wallet, you can just use your credit card. You can justify the purchase by saying that you are earning rewards anyway.
This undisciplined use of your credit card can cause you to rack up balances that are more than you can pay off at the end of the billing period. Thus, at the next billing period you not only have to pay the balance carried over, but also the interest accrued.
If you avail of a rewards card, you have to exercise discipline and use your credit responsibly. Otherwise, you may end up with a more serious debt problem that is not worth the rewards you’ve earned.