To determine if credit card rewards are worth it to you, the costs and benefits must be weighed.
Credit card rewards and “loyalty” programs can come in many different forms such as cashback, points, miles or other incentives.
These programs are designed to encourage people to use their credit cards for everyday purchases and to earn rewards for doing so. While the idea of getting rewarded for spending money may sound appealing, it’s important to consider whether these rewards are actually worth it in the long run.
Below, we’ll take a look at the costs and benefits of credit card rewards programs to determine if they are truly worth it.
KEY TAKEAWAYS:
- Rewards credit cards can be beneficial if used responsibly and if the rewards outweigh any fees associated with the card.
- Overspending to earn rewards can lead to debt accumulation and difficulty in paying off the balance.
- Debt consolidation may be a good option for those struggling with debt to chase rewards.
Beware – Credit Card Rewards Plans May Not Be So Great
With annual fees, high interest rates and other hidden costs, credit card rewards may not be as valuable as they seem.
For individuals who carry a balance on their credit cards, the interest paid can quickly outweigh any rewards earned. This is because the interest rates on credit cards are typically much higher than those of other loans.
In fact, according to Forbes, the average APR for credit cards is over 27.82%. In contrast, the average APR for personal loans is around 11.54% according to Bankrate.
Rewards programs may also come with restrictions and limitations that make it difficult to actually redeem the rewards earned.
For example, travel rewards may have blackout dates or limited availability, making it difficult to use the rewards when you want. Cashback rewards may also have a minimum amount that must be earned before they can be redeemed.
Let’s look at some hidden costs that may make credit card rewards less appealing.
The Hidden Costs Of Credit Card Rewards
While earning rewards can be enticing, it’s important to consider any hidden costs associated with these programs.
For example, many rewards credit cards come with annual fees that must be paid to continue earning rewards. These fees can range from $50 to over $500 per year and may not be worth paying for individuals who don’t spend enough on their credit cards to make up for the fees.
Another cost to consider is the interest rate on purchases made with a rewards credit card.
These rates can be significantly higher than those of non-rewards cards, and if you carry a balance from month to month, you could end up paying much more in interest than the value of any rewards earned.
The psychological effect of rewards can also be a hidden cost. When using a rewards credit card, some individuals may feel pressured to spend more to earn more rewards. This can lead to overspending and potentially putting oneself into debt.
You might justify a purchase by thinking that the rewards earned will make up for it, but in reality, you may end up spending more than what the rewards are worth for things that you don’t actually need.
The Benefits Of Credit Card Rewards (Do You Really Need Them?)
Many credit cards offer cash back or travel rewards, but do you really need these benefits?
For individuals who are already in debt or trying to stick to a budget, the temptation to use some of those travel points can cause an unnecessary splurge. It’s important to prioritize financial goals and needs before considering the added benefits of a rewards credit card.
Again, justifying an expensive plane ticket or hotel stay because you “have the points for it” can lead to increasing debt.
Some credit cards will also offer a higher percentage of cash back for things such as gas, groceries, or dining out.
While these can be helpful for those who regularly spend in these areas, it’s important to evaluate if the extra cashback is worth the potential overspending. If you’d save more money by walking but you want extra cash back for buying gas, you might be tempted to drive instead.
This can also come with the cost of insurance premiums, car maintenance, and other expenses associated with driving.
In some cases, the benefits may only be travel-related and if you are someone who doesn’t travel often, these benefits may not be worth it. It’s important to assess your lifestyle and spending habits before deciding if a rewards credit card is right for you.
The Cost-Benefit Equation Of Credit Card Rewards
Some math will be needed to determine if the benefits of a rewards credit card are truly worth it for your specific situation.
The first step is to calculate how much you’ll actually need to spend to earn the rewards.
As a simple example, if a credit card offers 1% cash back on all purchases and you spend $10,000 in a year, you’ll earn $100 cash back.
Next, we would need to look at the annual fee for the card, if there is one. If the annual fee is $100, that would essentially cancel out most of the cashback earned in this example.
However, if you were to spend $20,000 in a year and earn $200 cash back but still have the $100 annual fee, then it may be worth it or if the fee was waived for the first year.
However, as you can see, the math can get more complicated when factoring in bonus categories and different cashback percentages.
You might need to evaluate your spending habits and estimate how much you would spend in each category to determine if you’d actually come out ahead with a rewards credit card.
Regret Chasing Those Credit Card Rewards?
As previously mentioned, rewards may cause credit card holders to overspend to earn more rewards.
This can lead to debt accumulation and difficulty paying off the balance, leading to interest charges which would cancel out any potential benefits gained from the rewards.
If you’ve found yourself in this situation, debt consolidation may be a good option for you.
Debt consolidation is the process of combining multiple debts into one loan with a lower interest rate, resulting in lower monthly payments and potentially saving money on interest charges.
This can help manage debt more effectively and reduce the risk of accumulating more debt.
At Americor, we understand the importance of managing your finances wisely.
As America’s trusted source for debt relief solutions, we aim to empower you with financial knowledge that can lead to informed decisions, whether it’s about savings, investments, or managing debt.
If your debt has become unmanageable and you have difficulty making your debt payments each month, then you should consider a free consultation call with one of our certified Debt Consultants, who can provide personalized advice tailored to your specific needs.
By taking proactive steps today, you can put an end to your financial stress and work towards a brighter financial future.
Remember, there is always hope for debt relief, and our team of experienced professionals are ready to guide you on your journey to regaining control of your finances.
For more information on Americor’s debt relief services, contact us today to see how we can help you eliminate your debts, and get on the fast-track to becoming completely debt-free!
