Financial Puzzle

Credit Card Rewards Worth It?

Many credit cards offer cash back, miles or money for rewards. Rewards entice people to sign up for credit cards, but are those rewards worth it? For people who pay off their credit card fully each month, yes, they definitely can be. Unfortunately, many—if not most—people don’t do this. There’s a reason that credit card companies use rewards and, while it can be a benefit, that’s not the intention. Rewards are intended to influence buying behavior. Moreover, consumers tend to pay more for their own rewards and need to consider if rewards are truly worth what they’re spending.

Credit Card

Hypothetically, let’s say I own a rewards card that carries an annual percentage rate of 21%. The rewards card offers 1% cash back on all purchases. I spend $1,500 during a month and pay the minimum payment of $45. In this scenario, I actually pay $26 in interest and only earned $15 dollars in rewards. This is a simple look, but pretty clearly shows that if interest outweighs the reward, rewards aren’t worth it; I’ll just keep my $26 dollars.

It can be an enormous mistake to overlook a rate in favor of the reward listing. The rate in the previous example sounds high, but it’s the reality of having many bank-operated credit cards. The national average hovers around 15 percent and almost all of those are variable rates—they can fluctuate and make over-purchases, the exact kind of behavior rewards look to encourage, even riskier to your finances.

Additionally, many reward cards have annual fees. Your $400 in earned rewards can be immediately slashed when it comes time to pay this often overlooked cost. Annual fees aren’t light either and range from $50-$100.

Another concern, something to evaluate, is the actual reward value. Each card has different rewards and a points system making a true financial comparison or analysis incredibly hard to discern. How do you know if you are actually benefiting from a reward point? A card might state one point per dollar, but in reality that’s not what the rewards are worth. Rewards cost depends on the bank or Credit Card Company, as a starting point their worth around $0.0015. Blogger, ThePointsGuy keeps a rough outline of what card rewards are worth.

"Rewards are meant to keep you shopping and not doing what you need to for your financial health."

Rewards entice people, reel them in, and then keep them hanging. Not only do most people not make their money back, it becomes difficult to let rewards go to waste. Psychologically, it’s hard to ignore a usable balance. Worse is when a reward is set to expire. Unfortunately, this impulse leads consumers to burn that reward on something that costs more and starts the cycle over again. Rewards are meant to keep you shopping and not doing what you need to for your financial health.

It’s hard to see past a reward card and look at the wider picture, but, unless you can pay your card off fully every time and spend big money, rewards aren’t worth it. So many people get caught in the trap of thinking that they are losing out without rewards. Some might be thinking that they are leaving miles or money on the table. Realistically, though, you have paid for those rewards; they were never free to begin with. Rewards simply encourage consumers to spend more money, but if I overspend and can’t pay the full amount, interest cancels any reward and I am locked into yet more spending.

You won’t earn anything using a simpler card with a lower rate. You won’t see an “earned” balance or pool of perceived freebies, but you won’t have your payments diverted into interest and non-beneficial spending habits either. This will save you money in the long run and let you determine where your money goes.

In short, that trip or shopping spree you wanted to do now can happen without a rewards card. One of the higher-ups here at the credit union likes to use the KISS method for everything: Keep it Simple, Stupid. In this case, it definitely applies to keeping your finances clean.

About Colin

ACU logoI’m Colin McCabe, the newest Communications Specialist at Arapahoe CU. A recent college graduate from Colorado State University, I carry a background in writing and communications. I joined the team here with minimal experience in the banking industry, but this has presented a unique opportunity. Working at Arapahoe CU is complete immersion into personal finance, something that’s foreign to me. Luckily, I am surrounded by financial experts working for a not-for-profit. They provide stories, experience, resources and tools. Combining communications skills with my ever growing financial knowledge, I’m here to share perspective, work and the resources surrounding me. The Financial Puzzle was created for this reason.

Of course, my path towards financial success is just one of many and the credit union is here to help all. If there is an issue or topic you are interested in, let me know! I will get the staff working on your answer and help you avoid the inaccuracies laden in the internet’s search results.

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