It can be exciting to see that credit cards will give you cash, or other rewards, just because you spend money.
However, it’s important to realize that not all credit card reward programs are worth the trouble. Indeed, some of them have such difficult redemption policies, and there might be other costs, that significantly reduce the value of your rewards.
Before you start spending like crazy, consider the value of the rewards, and whether or not they will really work for you.
And consider some of your habits. You could be following financial practices that reduce the value in your credit cards, and not even realize it.
Points, Miles, and Cash Back
Your first consideration is the credit rewards system in use.
Many rewards programs allow you to earn miles or points. Generally, you receive one point or one mile for each dollar that you spend, plus bonuses in some cases, such as double miles on some purchases, or extra points.
However, you might see, quickly, that your points and your miles aren’t “worth” a dollar.
It might take 500 points or miles to redeem your rewards for merchandise that normally costs $5. Airfare redemptions are particularly “expensive” when it comes to redemption. In order to pay for a $350 airfare, you might need 40,000 or 50,000 miles. In many cases, that means that you have to use your card on all your purchases for a year or more just to get enough miles for the airline ticket.
Many people choose cash back rewards for just this reason. Instead of worrying about transforming tens of thousands of points or miles into small benefits, cash back offers you a pretty easy equation. You receive a percentage of your purchases back in cash.
It’s very straightforward. If you get 1% of the purchase price back, you end up with $1 for every $100 you spend. No trying to convert points to dollar values.
Don’t Forget Redemption Fees and Interest
Also, don’t forget about fees and interest.
First of all, you might be paying an annual fee. Some rewards programs are so generous that what you get for free offsets the cost of the annual fee. Some reward cards, though, charge a redemption fee when you decide to claim a reward. This doesn’t happen much with cash back cards, but it is becoming an increasingly common practice with rewards programs to charge a fee when you redeem for merchandise and sometimes even travel.
Finally, you have to remember that interest is charged on your balances. Many rewards credit cards have slightly higher interest rates. When you carry a balance, you will pay the interest charges, and you could very well end up paying more in interest than you receive in rewards.
This is especially a problem when you have miles and points rewards systems. The actual monetary value of these rewards usually works out to be somewhere between $0.0011 and $0.059 per point or mile, depending on the program. When you are paying more than $25 a month in interest, your rewards suddenly seem much less valuable.
Before you get a rewards card, think about the implications, and figure out what is most likely to benefit you in the long run.
And remember that some credit card rewards programs actually cost you more they than give you.