You cannot open your mailbox without a credit card offer staring you in the face. Since
the credit meltdown in 2008 the credit card industry reduced and then eventually
increased the amount of preapproved credit card offers being sent to prospective
cardholders. And most, if not all, of those card offers involve some form of credit card
rewards.
Rewards cards are very easy to understand, on the surface. You use the card, incur
charges and then earn rewards based on your usage. Rewards come in the form of
points, cash back, or airline miles. After you’ve accrued enough rewards then you can
claim them.
The devil, as they say, is in the details when it pertains to rewards cards. First off, the
interest rates on rewards cards are generally higher than those on non-rewards cards.
This, of course, is by design. The issuers are asking cardholders who carry balances
from month to month to do their part of subsidizing the rewards program costs.
Additionally, many rewards cards have annual fees. This causes you to subsidize yourown rewards. For example, if you have a $75 annual fee and you’ve earned enough
cash back points to get $150, you’ve paid for half of your own reward.
Then there’s the issue of chasing rewards. Chasing rewards is a problem all too
common whereby card users incur debt simply to earn rewards’ points. In this example
you’ve not really subsidizing the rewards, unless you carry a balance from month to
month, but you’re not getting the full value of the reward because you’ve purchased
things you wouldn’t have otherwise purchased.
I believe the best way to leverage rewards cards is to only use them if you don’t revolve
balances. And, you should consider using cash back cards, only. Cash can be used
to purchase anything else you’d “win” via a rewards program, and likely it can be
purchased cheaper at retail.
For example, in order to get a round trip ticket on Delta you’d need to use 25,000 miles,
and that’s if you’re lucky to find a flight with an open rewards seat. You would have to
spend $25,000 on a SkyMiles card to earn 25,000 miles. However, you could easily buy
a round trip ticket at a time that’s convenient for you for a few hundred dollars.
“The Credit Guru”, Longtime FICO Insider & Credit Industry Authority President Of The Ulzheimer Group, LLC
John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is the President of The Ulzheimer Group, the Director of Credit Education at DisputeSuite.com, Credit Expert at CreditSesame.com and the credit blogger for Mint.com. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has served as a credit expert witness in more than 150 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.
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