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.

SEE: Credit Cards

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.

SEE: 3 New Types Of Credit Cards To Look For

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.

SEE: 10 Considerations For Using Your Credit Card Abroad

Rewards Devaluation
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.

Related Articles
  1. Savings

    How Volatile Exchange Rates Affect Your Vacation

    Those ever-changing fluctuations can make a difference in anything from your hotel room to an ATM transaction.
  2. Credit & Loans

    Can Corporate Credit Cards Affect Your Credit?

    Corporate cards have a hidden downside. If the company fails to pay its bills, you could be liable for the amount and end up with a damaged credit rating.
  3. Investing News

    What Is The New Credit Card Chip Good For?

    Under current U.S. credit card requirements, credit card issuers are required to issue chip cards as of October 1, 2015. Instead of swiping your card as you do now, you will slide the card into ...
  4. Credit & Loans

    5 Ways to Maximize Your Credit Card Points

    How to get the most bang for your rewards buck.
  5. Investing

    How to Effectively Compare Credit Card Rewards

    There are so many different reward credit cards that are available. Understanding how each type work will help you pick the best card for your needs.
  6. Credit & Loans

    Joint Credit Cards: The Pros and Cons

    A joint credit card may sound like an easy way to split the bills, but make sure you know what you’re getting into first.
  7. Credit & Loans

    Travel Tips: Avoid Exchange Rate Headaches

    How to avoid the most common issues and hassles raised by exchange rates while traveling abroad.
  8. Investing

    Why U.S. Credit Cards Are Getting a Chip and Pin

    With the introduction of EMV technology into U.S. credit cards, consumers should worry less about fraud and counterfeiting.
  9. Credit & Loans

    What Qualifies as a Nonperforming Asset?

    A nonperforming asset is a loan made by a financial institution to a borrower who has failed to make any scheduled payments for at least 90 days.
  10. Personal Finance

    Best Ways to Exchange Currency

    How to avoid fees and get the best deal for your dollar.
  1. Transferable Points Programs

    With transferable points programs, customers earn points by using ...
  2. Luhn Algorithm

    An algorithm used to validate a credit card number.
  3. Roll Rate

    The percentage of credit card users who become increasingly delinquent ...
  4. Truncation

    The requirement mandated by the FTC for merchants to shorten ...
  5. Purchase Money Security Interest ...

    A security interest or claim on property that enables a lender ...
  6. Linked Transfer Account

    Accounts held by an individual at a financial institution that ...
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. What is the best way to start to rebuild your credit after a bankruptcy?

    Bankruptcies can be devastating to your credit score. Even worse, a bankruptcy will be listed on your credit report for between ... Read Full Answer >>
  3. What were the primary financial crimes involved in the ZZZZ Best case?

    ZZZZ Best was a company started by Barry Jay Minkow that claimed to be a carpet cleaning business. In fact, it was a Ponzi ... Read Full Answer >>
  4. Can a creditor sue me for a delinquent account?

    If a credit card account becomes delinquent, the creditor can sue the debtor for the balance as soon as the delinquency occurs. ... Read Full Answer >>
  5. How do I transfer my credit card history from one country to another?

    It is currently not possible to transfer your credit history to another country if you relocate. The credit metrics used ... Read Full Answer >>
  6. What are some examples of simple interest loans?

    Two good examples of simple interest loans are simple interest car loans and the interest owed on lines of credit such as ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!