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Credit cards that reward you with points or miles present an enticing option — they promise free points for every dollar you spend. Many of these cards entice new customers with sign-up bonuses valued at $500 or more, in addition to the points accrued from everyday expenditures.
However, not everyone should or can effectively chase these rewards due to various factors. In fact, for some, striving for rewards could lead to financial turmoil or negatively impact their credit score.
Before committing to a cash back or travel rewards credit card, it’s essential to understand how the pursuit of points and miles can backfire.
1. Accumulating Debt in the Name of Rewards
According to a recent report by Experian analyzing Federal Reserve data, only 45 percent of U.S. credit cardholders are able to pay off their balances in full each month. This implies the other 55 percent have accrued balances periodically, with many likely trying to earn rewards.
With the average credit card bearing an APR exceeding 17 percent, the math doesn’t work out. Earning 1 to 3 percent cash back while incurring over 17 percent in interest is not beneficial.
If you are charging purchases you cannot pay off monthly just to earn rewards, you should reconsider. Using cash or debit could prevent you from encountering high-interest debt. (See also: The 5 Major Risks of Credit Card Debt)
2. Overspending for Signup Bonuses
To attract customers, many cash back and travel rewards credit cards present initial bonuses that can be enticing. Often, these bonuses exceed $500 in points or miles, requiring a minimum spending threshold (e.g., spending $3,000 within three months to earn 50,000 bonus points).
While these promotions are attractive, they can lead to problems if you end up spending more than normal to qualify. If your typical expenses and bills do not meet the minimum threshold, how will you make up the difference?
Many individuals end up using these spending thresholds as an excuse to make unnecessary purchases, leading to a situation where they earn rewards but still deplete their finances. Such scenarios diminish the potential benefits and could result in less money than what they started with. (See also: 5 Clever Strategies to Meet a Rewards Card Minimum Spending Requirement)
3. Unexpected Expenses when Redeeming Travel Rewards
Another issue with travel rewards points is the unavoidable costs associated with redeeming them. For instance, if you register for a travel or hotel credit card offering a complimentary night certificate and bonus points, and decide to use them for a week in Hawaii, you might find yourself incurring expenses for flights, car rentals, and meals on top of that.
Though your hotel may be free, consider what the total trip costs you. (See also: Understanding How Travel Rewards Credit Cards Operate)
Plus, redeeming miles for international travel may entail substantial airline taxes and fees, which can quickly add up. Some airlines even impose significant fuel surcharges.
Additionally, premium hotels may have unavoidable charges like valet parking or resort fees. These costs accumulate, so it’s important to budget for them accordingly.
4. Excessive Annual Fees
Furthermore, many high-end rewards and travel credit cards come with significant annual fees. The top cards can charge $450 or more, which is a considerable expense.
These fees can be justified if you regularly earn enough rewards or utilize various travel benefits, but they can quickly add up. Before signing up for multiple cards with annual fees, ensure you have a strategy to derive more value than the fees incurred. If you can’t achieve that, then it’s best to reconsider.
5. Potential Harm to Your Credit Score
It’s crucial to realize that the way you manage your credit cards can negatively affect your credit score. For instance, applying for new credit cards can lead to hard inquiries on your credit report, which may cause a temporary dip in your score.
Your payment history accounts for 35 percent of your FICO score; thus, falling behind on payments can create significant issues. Moreover, credit utilization — the ratio of your debt to your credit limits — comprises 30 percent of your score, so maintaining high balances can also impact your credit.
The Conclusion
While credit cards offering points and miles can lead to lucrative rewards like free travel or cash back, they are not guaranteed to improve your financial situation. Ultimately, how you utilize these credit cards will influence whether they positively or negatively affect your finances.
Before applying for a rewards credit card, it’s wise to have a plan in place. Think about how to achieve the signup bonus without resorting to unplanned spending, and ensure you can consistently pay off your balance every month. Additionally, only incur annual fees for cards that offer corresponding value.
If this process feels overwhelming, it might be best to forgo it entirely and stick with debit.
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