Everybody loves free stuff. Even if we have to spend thousands of dollars to get it, if we didn't go to a store and directly purchase it, it feels free and that's a great feeling. Rewards credit cards may feel this way, but they can be quite deceiving.
As our grandparents may have told us nothing is free and that's true with rewards credit cards. Although credit cards can be a bit complicated alone, some credit card experts advise that if you're going to use a credit card, make it a rewards card. While there's certainly some wisdom in that advice, it's not advice that everybody should follow. Those rewards may not be rewards at all. You may have paid a lot of money to earn that $50 gift card.
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The Interest Rate Is Higher
Those same credit card experts warn consumers not to open a rewards credit card if they routinely hold a balance because the interest rate is normally higher. Rewards cards may add 2 to 3% to the interest rate in order to offer those rewards points. If you're the type of person that holds a balance, a rewards card is probably not the best choice. Instead, find a quality card with a low interest rate.
Most People Carry a Balance
According to creditcards.com, if you represent the average American household, you have an average of $15,799 in credit card debt. Of the 73% of households that have a credit card, 60% hold a balance making rewards credit cards a bad choice for most. If you can find a card with an interest rate comparable to the cards without a reward, a cash back card may still make sense but those offers are difficult to find.
The Annual Fee
One out of every four credit cards may have an annual fee with a median amount of $50, according to creditcards.com. This annual fee can wipe out the value of the rewards received by the average user even if they don't hold a balance. Experts want you to call the card company and get the annual fee waved. Many card companies will waive the fee rather than lose your business.
You May Not Use the Rewards
Are you one of those people who doesn't have the time to evaluate credit card offers? Maybe you have so many automatic payments charged to your card that switching to a different rewards card would be a task too monumental for you to take on right now. If that is your story, you're not alone. Many people are in rewards cards that don't fit their lifestyle and don't have the time or desire to make the change.
If you're amassing rewards in the form of airline miles, but you rarely travel or vacation, those miles may expire before you have the opportunity to use them. Cash rewards cards may be the best choice for people with a lifestyle that doesn't include traveling, and they would rather have the rewards applied directly to their balance instead of picking rewards from a catalog.
Did you know that your rewards points have value and that over time they lose spending power just like your money? Remember when a movie was under $10 or when gas was less than $1? The same thing happens with your rewards points or miles. Over time, it takes more points to purchase products making the points or miles you earned less valuable the longer you hold them.
The best way to avoid rewards devaluation is to use your points or miles as soon as possible. Cash rewards cards that award cash back towards your balance automatically helps to avoid devaluation, and one of many great ways to make your credit card work for you.
The Bottom Line
As with any financial product, your individual financial profile dictates which products are right for you. If you hold a balance or charge a small amount on your cards, rewards cards probably aren't the best fit for you. Low interest rate credit cards with no annual fee are likely more suited to your needs.