If you haven’t noticed, credit card companies are pretty dang smart. They know how to play the game of marketing—and from the looks of it, they play it well. From sign-up bonuses, rewards points, cash-back incentives and airline points, they know people love “free” things.
But we’re here to expose their biggest secret: Whatever they’re offering is not actually free. Those credit card points you’ve been accumulating always come at a price. And that price is what’s inside your wallet . . . and maybe your dignity. That’s the genius of it. Credit card companies get you to spend way more than what you would ever spend in cold, hard cash, and then they reward you with a teeny-tiny percentage of what you’ve padded their pockets with.
It’s time to decide for yourself: Are credit card points worth it?
How Do Credit Card Points Work?
Thinking about signing up for a new credit card and want to know if the points are really worth it? You’re not alone. Credit card companies know that they can probably twist your arm to sign up for their card with a few “perks” in the way of:
- Travel miles or hotel rewards
- Sign-up bonuses
- Cash back
- Discounts at restaurants and stores
The credit card rewards system goes a little something like this: The more money you spend, the more points you rack up toward whatever prize you have your eyes on. Once you hit a certain amount of points, you can trade those puppies in for some kind of “reward”—usually equivalent to cash back, more points, or the ever-coveted airline miles.
How Do Credit Card Travel Points Work?
You collect points or “miles” based on how far (or how often) you fly and how much you spend on your credit card (or how much credit card debt you have). Most travel rewards follow the “one point equals one dollar” guideline, but if you hit certain spending levels (by spending even more on your credit card), you may be able to collect extra points. Over time, your points build up, and you can redeem them once you reach a certain level.
Here’s the catch: Airlines only release a certain number of seats on the plane reserved for travelers with travel miles. That means when you try to cash in your miles, your options may be more limited than that flashy credit card brochure let on when you signed up. And don’t forget about those blackout travel dates. If you were hoping to use your points to visit grandma in Wyoming this Christmas . . . think again. It turns out your travel dates aren’t redeemable with your credit card rewards points.
But even if you are able to use your points to cash in on that “free” flight you’ve worked (and spent) so much for, you’re still going to be paying taxes and fees. Suddenly, that free flight isn’t all that free anymore, huh?
5 Dangers of Credit Card Points
1. The Allure of Cash Back, Points and Miles
One thing we can all agree on is the allure of “free.” That’s why you click on most emails in your inbox labeled “free gift with purchase.” No matter if it’s a free entrée at Chick-Fil-A with a minimum purchase or a “buy one, get one free” deal at your favorite store, the word free will cause most of us to stop what we’re doing and run to the store.
Trying to figure out the differences between rewards programs is about as easy as scuba diving in a bathtub. Are miles and points the same thing? Do your points add up to getting cash back in your wallet? Or do you cash in all all those points to get travel miles? It sounds simple enough until you read the fine print and see all of the rules and restrictions. All we’re saying is: Make sure to do your homework, because what you don’t know or understand as a cardholder can hurt you.
Cash back means actual money returned to your bank account, right? Not always. Cash back should mean that they send you a fistful of Benjamins, but sadly, this isn’t reality. This sneaky credit card incentive sometimes comes in the form of statement credits toward your balance (if you have one)—not actual dollars in your pocket.
Foreign Transaction Fees
Did you use your points to take a trip abroad? Some cards will tack on a fee for every transaction you make overseas. Fees are usually anywhere from 1–3%, plus whatever your bank charges on top of that.
Before you backpack across Europe with your shiny platinum card, make sure to check the fine print before you start racking up points—and transaction fees. Your trip of a lifetime (that cost you your life savings) just got even more expensive. Yikes.
2. Annual Fees
One way credit card companies make their money is through annual fees. When they sent that shiny flyer to your mailbox, they knew you’d be lured in by the bonus points, rewards and “free” money for signing up. But what they hid in fine print is how much their card will cost you per year in annual fees. If you don’t understand how they work, those annual fees will eat your credit card benefits for breakfast (and probably lunch too).
Let’s say your card offers airline miles and has an $80 annual fee. If you spend $8,000 on the card every year and pay it off each month, you’ll have racked up enough miles to get the free ticket in three years. Three years! And by that time, you’ll have spent $240 in annual fees alone. You could’ve already paid for your own flight with that money!
3. Interest Rate Bait and Switch
Some credit card companies love to entice you with a low introductory interest rate. You take the bait and sign up for the card. Then bam—your interest rate jumps 10% or more! No thanks.
Think about this for a second: When you open up a credit card, you’re likely to pay thousands of dollars in interest over the years as you carry a balance. Even if you promise to pay it off every month, all it takes is one lost or missed payment for your interest rate to skyrocket, your credit score to drop, and your credit card statement to get slapped with fees. By making just that one tiny mistake, you’ve gotten into a big money mess.
If you think a card’s low interest rate is too good to be true, it probably is. Don’t fall for the old bait-and-switch routine!
4. Reward Expiration Dates
Every card has its own set of expiration rules. Some points even expire after 18 months, which barely gives you enough time to rack up a significant amount of rewards.
But time isn’t the only thing against you. The fine print also outlines several ways your points could expire. Did you know you could lose all your rewards if you miss one payment? Policies vary from card to card, but cardholders could lose all or some of their points for missed payments, card inactivity or changes to the structure of the rewards program.
5. Low Interest Rate Caps = High Risk
Low interest rate caps are another way credit card companies hook you in. They may promise you cash back, but they set a limit on how much you can actually get. If they promise 1% cash back and have a $300 cap, you’ll have to spend $30,000 to get $300. That’s too much effort for too little reward!
Manage Your Money Without Credit Card Rewards, Points and Hassles
If you’re still asking yourself the question, Are credit card points worth it?, we hope you’ve found your answer. But just in case, we’ll say it again: Credit card points are nothing but bad news—especially for people who don’t follow a budget and are tempted to overspend. If impulse buying and overspending come naturally to you, the pressure to spend more in order to get those rewards, points and miles will be on your shoulders. After racking up $5,000 in debt on your card, you’ll be wishing you could swap some of those credit card “rewards” for a large payment toward your debt. Was putting that $200 steak dinner on your card last month really a good idea?
If you’re concerned about points, rewards and cash-back offers, you’re obviously someone who wants to be smart with your money. Good news—you’re on the right track! But trust us: There’s a better way.
Focus on creating solid, long-term spending habits like keeping a zero-based budget and saving up for that dream trip to Europe (instead of trying to spend more to earn credit card points). When you do that, you could build a lasting financial future that doesn’t include credit cards—ever! All you have to do is build up the courage and motivation to take the first step.
Learn how to dump debt for good and save for the future (without the help of credit card points) with Financial Peace! Start a free trial of the Financial Peace Membership and take control of your finances!