It sounds too good to be true – spend money and earn bonuses while you’re enjoying yourself out shopping. You more than likely tell yourself now and again that that new purchase was worth it “because of the added extras”. But don’t be lulled into a false sense of security. Do you really know what the perks of your rewards credit card are? Are they actually worth it?
Nearly 80 per cent of new card accounts opened in the first quarter of 2014 were rewards credit cards, according to the American Bankers Association. So you’re not alone in thinking that these cards are worth all the hype. But there are some traps that you may have fallen into when signing up and using one of these rewards cards. Here I’m going to explain some of the issues with these cards and how to choose more wisely when looking at your finances.
Check the Annual Fee
Many people jump straight into picking up a rewards credit card without checking out the hidden extras first, such as the annual fee, which many card providers have in place. Or if they do notice this additional outlay, they don’t actually work out whether or not using the card for the bonuses will be feasible for them. A recent survey showed that a shocking 31 per cent of rewards credit card holders didn’t even know what their annual fees were!
Let’s do a little bit of math here. The average fee for one of these cards is $58 a year. The average rewards point is worth just 1.14 cents. That means you need to be spending over $5000 a year just to cover the fees and actually benefit from the rewards! So make sure you check your arithmetic before you sign on the dotted line.
I’m not saying that it’s impossible to offset the annual fees. You may also find that cards with higher fees come with better bonuses. Plus there are some credit cards that have no annual fee at all. You may find that these offer a lower rate of reward, but it might be worth it if you’re not a big spender. Work it all out beforehand.
Don’t Overlook the Rewards
This sounds like an obvious thing to say, but it’s surprisingly easy to lose track of what rewards you’ve amassed over time, especially if you have more than one credit card. There are so many different rewards on offer, including:
- Airline points/air miles and flights
- Vacations and days out
- Store loyalty points
A recent survey showed that one in five people didn’t claim their rewards on their credit card within a year of receiving them! Although with some cards it makes sense to save up your points, such as with air miles, with others you run the risk of the reward expiring or losing value. Make sure you choose a rewards credit card that actually has rewards that interest you, and keep a check on how much you’ve amassed in a certain period. You may wish to choose a point in the year to check out how big a reward you’ve got. (Store points are great to spend at Christmas time!)
Keep an Eye on Your Cards
It’s so easy to be drawn in by tempting offers and great interest rates. It’s not surprising, therefore, that many people have more than one credit card. Although this is a good idea in theory – having a mix of bonuses or accounts to choose from when making a purchase – it’s commonplace for people to lose track of what money they have and what money they owe. Most people have two rewards credit cards. Thinking logically, that means that you have to spend twice as much to be able to offset the annual fees (I refer you back to the math earlier on in this article.) If you think that you can keep on top of your finances and you want to opt for more than one rewards credit card, choose one with no annual fee at all.
In conclusion, don’t be fooled by the sparkly razzle-dazzle of a reward credit card that suggests that you’ll be earning money while you spend it. In all honesty, the rewards on offer are usually pretty tiny and take quite a while to amass. Plus, there are likely to be those that you won’t really get around to using. If you don’t fly very often, for example, why go for a card that offers air miles?! By all means, keep an eye out for any new deals that come on the market, but look at the more important aspects of the card before you look at the rewards – the interest rates and any fees that you’ll have to pay. After that, enjoy your shopping. But remember, all that glitters is not gold!