Points, miles, cash, Oh my rewards card!
Every credit card company wants its card in your wallet and most are willing to pay for it via points, miles, or cash back. Some even double or triple your rewards on certain categories of spending.
But before you sign the application, take a moment to make sure that the card won’t reward you with regret. Here’s a rewards card guide that may help:
It’s hard to say no to free money. After all, that’s how credit card companies attract your interest: With the allure of some sort of reward. These programs work by enticing you to use a certain card to make your purchases. Every purchase (or only a qualifying purchase, depending on your card) earns you some sort of reward, such as miles, points, or cash back.
Why do card companies do that? To profit from your spending habits. Card companies generate transaction income on every purchase; each time you use their card, they profit. Plus, the interest you may pay for carrying a balance is usually higher than the cost of rewards given back. While you can earn rewards without interest charges by paying off your balance each month, almost half of all credit card owners are carrying a balance, according to the Federal ReserveThis link opens a third-party website not affiliated with STCU..
Is a rewards card right for me?
While earning rewards is appealing, a rewards credit card isn’t for everybody. While some cardholders brag about their rewards, many others are quietly racking up debt. The temptation to earn rewards can break your budget, causing you to carry a balance and to make interest payments month after month.
To avoid falling into that trap, consider if these statements are true for you:
_____ I like to earn cash, travel, or other rewards based on my spending.
_____ I can channel most of my spending through my credit card.
_____ I pay off my credit card balance each month.
_____ I can accept a higher interest rate or annual fee in exchange for the ability to earn rewards.
If you agree with all four statements, a rewards card might be perfect for you. If not, consider holding on to that application a bit longer.
What’s the catch?
It’s important to ensure that the rewards card you choose is going to be the right fit for your spending habits, or those rewards you hoped to earn might go to waste. Some things to consider when picking a card include:
- Redemption options: Use the most valuable redemption option to get the most from your points. Most cards offer multiple redemption options and your points won’t always be worth the same amount.
- Spending tiers: Some credit cards require you reach a certain level of spending before you can earn the rewards you’re really after.
- Registration: Ask your credit card company if you need to register for rewards. Some places require you to create an account before any of your purchases will begin to rack up rewards.
- Limits: Not all rewards are limitless, so be sure you won’t hit the cap and miss out.
- Penalties: Some credit cards require you to use your rewards within a certain amount of time or risk losing the points entirely. Similarly, some rewards are limited to restrictions like blackout dates.
- Changing terms: Some cards change their reward earning criteria — or even their rates — based on usage, time of year, or other criteria. Carefully read the terms and conditions and set reminders for yourself to monitor what the changes might be.
- Fees: Ensure whatever fees you might be paying — annual fees, foreign transactions fees, etc. — will be outweighed by the rewards you earn.
How do I pick one?
Talk over the decision with others. Discuss the decision of a rewards card with anyone who would be on the account to determine which card is the best fit. It may also be wise to talk to a financial adviser to ensure your credit score and financial goals are being considered.
Here’s a list of ways to ensure you’re getting the most from the card you choose:
- Never carry a balance. By paying your bill in full each month, you’re earning rewards without paying for interest. Don’t be tempted to increase your debt just a few extra points.
- Align rewards with your passions or select a cash-back card: Everybody loves cash!
- Compare the offer with other cards and dump the rest. Don’t short yourself by using too many rewards cards. Narrow down what cards work best for you and stop using, or close, the others to maximize the benefits on the best card.
- Funnel your spending. If you’re able to pay off the card each month, try funneling all your spending through your rewards card to earn rewards faster. Try to keep your card balance below 30% of your credit limit. This threshold keeps your debt-to-income ratio low, showing lenders responsibility and keeping your financial reputation sound. To protect your credit score, consider making payments throughout the month to ensure you don’t reach that threshold.
By planning ahead for responsible management of your money, you could turn your credit card into a very rewarding experience.