The Downside of Credit Card Rewards

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The three types of credit card rewards are cash back, points, and miles. All seem attractive when you’re deciding on a credit card. The concept is simple: You charge for goods, and the result is a reward from the credit card.

But are you really being rewarded? There’s a secret that credit card companies don’t tell you that could cost you more than the rewards are worth. Here is the downside of credit card rewards.

Reward Credit Cards Can Cost

Credit cards allow you to have revolving debt. Revolving debt will enable you to withdraw from, repay, and then withdraw from again. There are three types of revolving debt:

• heavy revolvers, which carry balances over to the next month continually
• light revolvers, which sometimes carry a balance over to the next month
• transactors, which never carry balances over to the next month

According to the Federal Reserve, the total U.S. consumer debt for heavy revolvers, as of December 2023, is $1.31 trillion. By the end of 2023, 49 percent of Americans became debt revolvers. This was up from 39 percent in 2021.

Sixty-one percent of individuals with a credit card carry $5,875 in monthly debt. And 84 percent of these heavy revolvers have a rewards credit card. More than 47 percent are using credit cards solely to earn points.

However, the average reward credit card for rewards points charges 20.24 percent to 29.0 percent interest, and the annual fee is anywhere between $95 and $500.

This means that 84 percent of heavy revolvers are probably not receiving enough points, miles, or cash back to make up for the interest they pay monthly. They’re losing money.

Know Spending Habits

How do you use your credit cards? Before you sign up for a high-interest rewards card with a large annual fee, analyze your lifestyle.

You may use your miles to take big trips. But if you don’t pay the trip off immediately on the credit card, you’ve negated the savings.

Maybe you use your credit card for day-to-day expenses such as gas and groceries. If you always pay that off at the end of the month, a rewards card may be the right choice. You won’t be accumulating debt and losing points with high interest rates.

Comparing Credit Cards Rewards

Credit card companies can afford to pay rewards by charging high interest rates and annual fees. When comparing credit cards, ensure you look at that. This is especially true if you carry a balance into the next month.

It’s even better if you can find a rewards credit card that gives you zero percent interest for the first few months. You'll earn points longer without paying interest.

If you’re a traveler, check if the card has transferable points to move to one of their travel partners. That will give you the flexibility to use it. Some airlines and hotels provide value when you transfer points.

But read the fine print before doing this. You could also lose money.

Tiered rewards points offer you rewards at different levels. These give you different point values for different categories.

For example, you may receive $5 for travel but only $3 for gas. Groceries may only bring you one point.

This goes back to analyzing your spending to choose a card that matches it.

Eraser points offer a fixed value per mile or point. They are very flexible for redeeming. Most of them give you statement credit. Many of them must be used within 12 months.

Whichever you choose, look for a credit card that gives you options.

Credit Card Rewards Expiration

There are several ways that you will lose your credit card rewards. Ensure you read the fine print and know the expiration periods.

If the account is inactive for an extended period, you may lose the credit card and, therefore, points. The amount depends on the credit card.

If your account is not in good standing, the rewards may be removed, or you won’t have access to them.

If you return a purchase, you will lose the rewards. Instead of returning an item, request store credit and retain your rewards.

Avoid These Types of Credit Cards

The number-one type of credit card to avoid is one with a high interest rate. The rewards are for naught if you’re paying for them with interest. A sizeable annual fee will also eat up rewards.

Reward points that you can only use with a specific spending partner should also be avoided. They may be limited to the retail or service you commonly use, so you‘ll not use your points, and they’ll go to waste.

Finally, avoid cards with complicated redemption schemes. If you can’t figure out how to use the points, you won’t use them.

Are Reward Cards Worth It?

Yes, credit card rewards can be a benefit. But whether they’re worth it depends on your lifestyle.

If you carry a balance over each month and it takes several months to pay it off, the interest paid will eat away at your rewards value.

But if you pay off your credit card monthly, rewards can be a valuable tool to save money.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.