Everyone likes to be rewarded, and credit card points programs are all the rage these days. Now, just like the extreme couponers of yesteryear, there are rewards chasers—people who go out of their way to collect the most points using their credit card. But, are credit card points really worth it? We take a look at 5 questions you need to ask yourself to make the call.
A Credit Card Points Program for Every Lifestyle
Rewards points aren't a new phenomena. In fact, they’ve been around in some form or another since the 1700s. But what makes points cards even more enticing today is that consumers can pick and choose from a plethora of cards that can provide the rewards that best suits their life and lifestyle. Are you a traveler? A budgeter? Into the latest gadgets and trends? Nowadays you can get cash back for purchases, or collect points that can be put towards airfare, gas, hotels, restaurants, retail stores, appliances, gadgets, and so much more. In some cases you can even use your points towards tuition (imagine that!).
5 Questions to Ask Before Applying for a Points Card
When you sign up for a credit card with a rewards program, generally, the more you spend the more points you earn to spend on your ultimate goal (anything from a free Starbucks latte to an overseas trip). Greedy Rates recently released its list of the best credit cards in Canada and best reward credit cards, noting which were ideal for travel or lifestyle rewards, cash back, and more. However, before you run out and apply for any, you need to think if you really need them and whether you can manage your credit card. That’s because there can be some serious disadvantages to credit card point chasing.
So, before you start applying for points cards, you should ask yourself the following questions.
1. Can I pay off my balance each month?
If you’re not able to pay your credit card off each month, the rewards simply aren’t worth it. Consider the following scenario. Most cashback cards earn you an average of 2% on each purchase made. So, if you spend $500, you’ll earn $10. Now, if you carry that balance over to the next month with an average interest rate of 18%, you’ll incur $15 in interest charges. That’s a $5 loss, which will continue to grow month over month if you don’t pay the balance. The reward isn’t so rewarding now, is it?
2. Do I really get cash back?
It’s important to remember that even the best rewards credit cards offering cashback may not actually give you cash back. Instead, you can use the points to purchase rewards or gift cards, or apply the dollar amount back to your credit card balance (which also doesn’t constitute a payment). Only some will actually put the money into your bank account, and that’s generally only after you’ve accumulated a certain amount.
3. Does the card have an annual fee?
Before you sign up for any credit cards with rewards, you’ll want to check the fine print to be sure there’s no annual fee (with so many cards available today, there’s really no need to be paying a fee). Creditors know that can lure people into applying with a lot of bonus points, but if you have to pay $80-180 annually to get them, they’re not worth it and can cost you more in the long run.
4. Do the rewards have expiration dates?
This is another one for the fine print. Some credit card points expire, some in as few as 18 months, which may not even give you enough time to earn and use them. Some creditors will also take away your rewards for card inactivity, or, even if you miss just one payment. So, it pays off to understand each individual card’s rules.
5. Are there spending caps?
When does 2% beat 5%? When credit cards have a cashback spending cap. They may advertise a great 5% cash back rate, but after you hit the limit, the rate drops to a measly 1%. That means that big spenders could be missing out on hundreds of rewards dollars per year. For these individuals, a credit card with a lower, but unlimited, cashback percentage may be a better deal than a high percentage cash back card with a cap.
Using a Rewards Card Responsibly
Credit card rewards can work for the right person; some people can earn hundreds or thousands of dollars per year, and enjoy other perks such as free flights, stays, and meals. However, for people who are struggling financially, or for those who have a hard time sticking to a budget or paying off their balance each month, even the best rewards credit card is likely not a good idea. It can be especially dangerous for those who are prone to making impulse purchases, as they may tend to overspend just to get points—spending more than the points are actually worth.
Contact Credit Canada for Credit Card Debt Help
Before you think of opening up a credit card with rewards, make sure your other consumer debt is paid off completely and that you have a solid budget in place (our free budget planner can help). If you have further questions about rewards cards, or are just looking for financial or debt management help, call us at 1.800.267.2272 for free and confidential advice.