Credit card rewards are one way credit card companies entice people to open an account. While there are some great rewards offered—perks like free trips, discounts on purchases, and cashback—it is important to use credit responsibly, regardless of rewards offered.
And while many people view credit cards as a bad thing, they can be a useful financial tool if managed properly. Credit card rewards are another great perk. If you are considering getting a rewards credit card, ask yourself these questions first.
Paying Off Your Cards Monthly
Putting it bluntly, if you do not pay off your card in full each month, the rewards aren't worth it. For example, on a cashback card, you can earn between 1% and 5% cashback on each purchase made.
If you have an average APR of 15% on your credit card and carry over a balance, you’re paying much more in interest than you are earning on your cashback reward. So it would save you money to pay for your purchases in cash, rather than sign up for the credit card simply for the cashback deal.
Do You Have an Annual Fee?
Another thing to consider is the annual fee that you are charged for having a credit card. It often makes sense to look for a credit card without an annual fee. With so many credit cards on the market now, there’s no reason to pay an annual fee.
Sometimes, however, depending on the types of rewards you are looking to earn, it may make sense to get a credit card with an annual fee if you expect that the value of your rewards will exceed the cost of your annual fee. Before signing up for a reward-based credit card, you should check to see whether you are on track to earn more in rewards than you would pay in the annual fee. Then you should compare that with similar rewards cards with no fee to see whether you would come out ahead by switching cards.
When You Can Use a Rewards Card
If you pay off your balance in full each month, then a cashback or a rewards credit card may be a wise choice. Some people earn hundreds or even thousands of dollars a year in credit card rewards, not to mention free flights or hotel stays. It's important to read the fine print on your rewards card to be sure that you can use the rewards you are trying to earn.
A rewards credit card is a good choice only if you are already sticking to your budget and truly paying your balance off in full each month. Otherwise, you are not getting the deal that you think you are. Remember, you need to be financially ready to handle a credit card before you can benefit from a rewards card.
Why Do Banks Offer Rewards Credit Cards?
Reward credit cards are used to encourage people to put money on their credit cards to earn rewards. But remember that when people make purchases with credit cards, they tend to overspend—and reward credit cards are one of the best ways that credit card companies have to encourage people to keep spending money on their credit cards.
If you currently have a large amount of credit card debt, you should stop putting things on your card until you have paid it off completely. Once you have done that, you may consider using it for the rewards, as long as you can pay off the balance in full each month.
Make the Most of a Rewards Card
First and foremost, you need to pay off any consumer debt before even considering opening a reward-based credit card. Get on a budget and stop using your credit card completely. This practice will help you develop the self-control and budgeting know-how to prevent credit cards from becoming a problem in the future. A debt payment plan will also help you pay off your debt more quickly and save on interest.
Once you stop paying interest on your credit cards, you may be able to benefit from reward credit cards. Shop around and find a rewards card that earns perks you'll use. Some reward credit cards will even make cashback contributions to an individual retirement account, college savings account, or a brokerage account.
If you travel frequently, a travel or airline miles card might be a good choice. If you are looking to earn money back on your purchases, a cashback rewards card might work well. Then, use your cards for a set amount of certain bills each month and pay off the balance in full each month. That way, you'll accumulate rewards but not debt.
Canceling a Rewards Card
If you find yourself carrying a balance on your credit card, you should stop using your credit cards for the rewards. You may want to cancel it once you have paid it off if you know that you will have a difficult time using the credit card wisely. You may want to look for a new rewards card if you are paying an annual fee on the card.
Researching new cards and looking for the best rewards and lowest or no-fee cards can help you make the best financial decision for you. However, if you are getting ready to buy a home, you may want to wait until you have your mortgage before applying for new cards and closing old ones.