Financial experts often disagree on the use of credit for every day purchases. Yes, they can offer tremendous perks, but annual fees and one late payment can often negate those benefits and leave you owing more money than you originally ‘earned’ or saved.
Credit cards can also be very misleading – have you ever tried to read, much less cognitively understand, the legally jargon, that fine print at the bottom of those persuasive brochures? There’s often a reason the font is too small for you to see!
Read more: How to get your finances in order in 30 days
What’s behind the mice type?
One of the details often included in those tiny paragraphs is an unassuming annual fee, which is often waived for the first 12 months to entice consumers to sign up. Annual fees can range from $25 to several hundred dollars, depending on your credit score and spending limits. Using a 1% cash back card, a consumer would have to spend at least $2,500 before they actually started earning rewards. Unless you make some hefty financial exchanges using the card, it’s usually best to go with a provider that does not charge an annual fee.
Two of the most popular perks with a rewards credit card are cash back and/or airline mileage. Travel rewards points are typically comparable to a 1-2% cash back card in the sense that $0.02 can be earned from a $1 purchase. Usually, travel rewards cards offer a starting bonus, so shop around for a company that provides initial incentives. Although certain credit card companies allow these rewards to be used for more than just airline tickets (hotels, rental cars, etc), there are definitely limitations and restrictions with redemption. Be sure to thoroughly examine the terms of your contract to determine if you will realistically use what you earn.
If you don’t travel often, a cash back card is probably the most realistic choice if you are interested in tapping into these benefits. These reward programs vary, but the average return is between 1% and 6% with the rate depending on the types of purchases being made.
For example, one month there might be the opportunity to earn more cash back from restaurants while the next month, the company switches their best perks to fuel purchases. Other credit card companies offer the same, consistent return rates month to month. Personally, our cash-back credit card provides 5% back on fuel, 3% on travel and dining and 1% on all remaining purchases.
Lastly, be sure to review any limits that might be associated with your cash-back rewards. Some companies only allow rewards on the first $1,500 spent in a 3-month period. This means that a consumer would only be able to earn $300 cash back each year. Sure, $300 is a great return, but other cards may not have limitations, and therefore, could allow for more money back in your pocket.
Don’t forget about the interest rate!
Now, it’s time for a curve ball: interest rates.
When you buy anything on credit, the lender typically earns a certain percentage of the loan as their payment for giving you the funds upfront. Luckily, many credit card companies waive their interest rates for the first year. This means that even if you don’t pay off your statement balance each month, you will not incur interest fees. However, interest is typically tacked on after your first year, and maybe sooner, depending on the terms of the card. If the purpose of your card is to earn rewards, be sure to pay off your statement balance each month to avoid these interest charges.
Although rewards cards are available for folks with not-so-great credit, the better perks are usually offered to those who have higher credit scores. If you do not have a good track record when it comes to making payments (on time), chances are, a rewards card will not do you any favors. In fact, if you have a bad history with credit cards in general, these types of programs can actually end up costing you more than a traditional credit card with a minimal spending limit.
It’s important to remember that some credit cards also offer other ‘hidden’ perks like damage protection, guaranteed returns, travel assistance, and price match guarantees. Always review the terms of any credit card agreement before signing on the dotted line! It could be a really great way to save money, or it could be a black hole that ends up costing you more.
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