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Credit card companies know exactly how to market to our wishes. They know we love our points, miles and rewards—aka the incentive trifecta. And we’re falling for their offers blindly.
Before you sign up for a card just to get free airline miles, let’s go over the basics.
How do credit card rewards work?
The credit card rewards system goes a little something like this: the more money you spend, the more credit card points you rack up. Once you hit a certain threshold, you can trade in those points for some kind of “reward”—usually cash back, points or miles.
How do credit card travel points work?
You collect points or “miles” based on how far you fly and how much you spend on your credit card. Most travel rewards follow a straight one point equals one dollar guideline, but if you hit certain spending levels (by spending more on your credit card), you may be able to collect extra points. Over time, you build up points and can redeem them once you have enough.
But airlines only release a certain number of seats on the plane to be purchased with travel miles. That means when you try to cash in your miles, your options may be more limited than that flashy flyer promised you. And don’t forget about blackout dates. If you want to use your points around a major holiday, think again.
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Even if you are able to use your points to cash in on a “free flight,” you’re still going to be paying taxes and fees on your ticket. Suddenly, that “free” ticket doesn’t sound all that free anymore.
5 Dangers of Credit Card Rewards
1. The Allure of Cash Back, Points and Miles
According to a recent survey by NerdWallet, 73% of cardholders consider rewards to be one of the most important factors when choosing a credit card.(1) At the same time, nearly one-third of cardholders don’t really understand how to earn rewards, and one-fifth don’t grasp the dollar value of the rewards earned. And what you don’t know or understand as a cardholder can hurt you:
• Cash Back
Cash back means actual money returned to your bank account, right? Not always. This sneaky incentive sometimes comes in the form of statement credits—not actual dollars.
• 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.
• Miles vs. Points vs. Cash Back
Are miles and points the same thing? Do your points equal up to cash back? Or do you cash in points to get miles? It sounds simple enough until you read the fine print and see all the nuances and qualifications for each one.
2. Credit Card Annual Fees
Did you know that 30% of credit card users are confused by the extra fees?(3) With good reason! If you don’t understand how they work, annual fees will eat your credit card benefits for lunch.
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 accumulated enough to get the free ticket in three years. Three years! And by that time, you’ll have spent $240 in annual fees alone.
Why not skip the credit card and just buy a plane ticket with the money you’d save on fees?
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 bill to get slapped with fees. With just one mistake, you’ve gotten into a big money mess.
Low interest rates are too good to be true. Don’t fall for the old bait-and-switch routine!
4. Credit Card Reward Expiration Dates
This is just another “gotcha” in the credit card world. Every card has its own set of expiration rules. Some points even expire after 18 months, which barely gives you enough time to even rack up a significant amount of rewards!
But time isn’t the only thing not on cardholder’s side. 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 forfeit all or some of their points for missed payments, card inactivity, or changes to the structure of the rewards program.
5. Credit Card Low Caps = High Risk
Low 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
Credit card rewards 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, you might feel the pressure to spend more in order to secure those rewards, points and miles. Trust us though, $5,000 in debt later, you’ll be wishing you could swap some of those credit card “rewards” for an extra payment on your debt.
Look, people who are concerned about points, rewards and cash-back offers are obviously people who want to be smart with their money. Kudos to you! But there’s a better way.
If you focus on creating solid, long-term spending habits instead of calculating rewards, you could build a lasting financial future that doesn’t include credit cards—ever! All you have to do is muster up the courage and motivation to take the first step and do it.
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