A lot of people these days are asking, "Are credit cards rewards cards really worth it?" When credit cards first came out with points that rewarded you for using your credit card, many people initially saw this as the ultimate way to get free stuff—just put everything you buy on your credit card and get free flights and merchandise for buying the things that you would normally buy anyway. It sounded almost too good to be true.
The Surprising Down Side of Reward Credit Cards Many Don't Think About
As it works out, for some, reward credit cards are too good to be true. Here are some of the potential drawbacks of using a credit card with rewards:
- A number of studies have shown that people tend to spend anywhere from 12% to 23% more when they shop with a credit card. So while it may make a lot of sense to put all of your normal purchases on a rewards credit card to earn some “free” rewards, would your rewards still be worth it if you had to spend 12% to 23% more on everything else you buy?
- Many people don’t pay off their credit card balance in full every month. If you don’t, after interest and fees are added on, you will probably end up spending 50% more on all of your purchases.
- Many rewards cards charge a fee. They can range from $15 to $450. If you are paying a fee to get “free stuff,” then the rewards may not be such a good deal. If the fee is small and you earn a large number of points, then the fee may be worth it. Just make sure that you compare your card’s fee to what you will get for “free” each year.
- If you only shop at stores that offer your preferred rewards—or that accept your rewards card—you can end up spending a lot more money than if you only shopped at the store that offered the best price.
- If you fall behind on your payments, you can lose all of your points.
Studies show that people tend to spend 12% to 18% more when they use credit rather than cash. If you’re someone who pays for everything with a credit card in order to collect the points or get cash back, you could save well over $3,000 per year by paying with cash instead. If you live in an average Canadian household, have one of the best cash back credit cards and put everything you can on your card, you’ll only get back $400 for the more than $3,000 in extra purchases you’ll most like make. So how can you get points or cash back without falling into this trap?
1. Only pay for fixed expenses with your credit card. Fixed expenses are determined in advance so there is no room to spend more just because you feel like it. Fixed expenses include such things as fuel for a vehicle, a gym membership, Netflix, subscriptions, insurance, scheduled vehicle maintenance, etc. While groceries are a fixed expense too, there is so much opportunity there to spend more than you need. That’s why this one is best taken care of with cash.
2. When you want to put a one-time purchase on credit, don't buy it right away. Give yourself a few days to think about and talk about it with your partner or a friend and make sure you have room for it in your budget.
How to Make Reward Cards Work
Despite the drawbacks of reward cards, many people appear to be able to make them work well. The key to benefiting from a reward credit card is having a spending plan and sticking to it (this is also called budgeting). If you allocate a certain amount of money for groceries, eating out and entertainment each month, pay for these expenses with a rewards credit card, faithfully spend within your budget and pay off your credit cards in full every month, then using a rewards credit card to earn free point is potentially a good deal for you. If you don’t stay within your budget, and if you don’t pay off your credit cards in full each month, then using a rewards card is probably not in your best interest.
Some credit card rewards programs that are tied to airline miles or gift points are not as good a deal as they once were. Some programs have become very restrictive by limiting the flights that you can choose or by increasing the points it takes to earn some fights. Fortunately, many credit cards offer alternatives such the ability to redeem points as gift cards, vouchers, merchandise or cash back. A number of websites and magazines that track credit card reward programs have been increasingly recommending the cash back option as the best value for consumers. However, this choice depends on how you use your credit card—or if you even choose to use a credit card at all. As the studies have shown, if you don’t use a credit card, you may be able to save 12% to 23% on your overall spending. No credit card rewards program can come anywhere close to matching these kinds of savings.
Three Kinds of People Rewards Credit Cards Aren't Good For
If you're the kind of person that doesn't have a budget, doesn't follow your budget, or if you don’t pay your credit card balance off every month, you are probably better off paying cash and not using a rewards credit card. Also, if you're really trying hard right now to reduce your expenses and spend as little as possible so that you can get out of debt or save for an important goal, just paying with cash rather than using credit should help you too. Having said this, if your financial situation is solid and you follow your budget and pay off your cards every month, then a rewards card can be a great tool to try to get more value for your dollars by earning free rewards. Then your only choice becomes which reward card is best for you! If you need to create a budget or need to work on your budget, click here for some help.