Rewards credit cards are a great tool to earn cash back or miles and points, but it isn’t always sunny in Rewards Credit Card Land.
There are certainly pros and cons of rewards credit cards. If you understand the cons, you will be better able to avoid them so you can take advantage of the pros! Follow along to learn more about the pros and cons of rewards credit cards so you know whether to say “yes” or “no” the next time you think about applying.
The advantages of rewards credit cards
We are going to start with the pros of rewards credit cards. These are the benefits you should consider when shopping around for a rewards card that should help you decide if it is a go or no-go. These are the biggest benefits to look for:
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The first place to look for a credit card benefit is the rewards program. Each time you use a card to pay, the credit card issuer takes a portion of the transaction as a fee. Your credit card rewards come from that interchange fee the bank charges each store you shop at, online or offline.
Cash back rewards programs regularly pay 1% to 2% cash back on everyday purchases, with some bonus categories paying as much as 5% with quarterly rotating cards like Chase Freedom®. Travel rewards cards can give you even more value, as you can redeem for more than 1 cent per point in value to really stretch your reward as far as it goes. In both cases, the rewards program is the reason to use a rewards credit card.
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When you get a new card, you may find you can earn a giant bonus if you spend a certain amount within the first few months after getting a new card. Never spend more than you would anyway because of a credit card, but you may want to stock up on gift cards for your favorite grocery store or retailer to put yourself over the hump.
Top cards offer as much as 100,000 to 150,000 point bonuses worth thousands of dollars in free travel. You will regularly find bonuses in the 40,000 point to 75,000 point range that are also quite lucrative. For travel rewards cards, 50,000 points is usually enough for two domestic round-trip flights or one round-trip to Europe!
When traveling, everything doesn’t always go according to plan. When flights are delayed, disasters strike, or illnesses happen, the best cards will reimburse you for the cost of your trip or help you figure out alternate arrangements.
Not all cards offer travel insurance, but the ones that do give you something very useful at a low cost. Common coverage includes rental car insurance, travel insurance for airfare, hotels, and other reservations paid for with the card, and a concierge service to help solve problems that arise anywhere in the world.
When you buy something and find the exact same item at a lower price the next day at the same store, it can be very frustrating. It is even more frustrating if the store won’t refund the difference back to your card. But with purchase protection, that is exactly what happens when you send in proof to the card issuer’s purchase protection company.
Some cards also offer an extension of the manufacturer’s warranty and offer item replacement if it is stolen or damaged within a short period after buying. I’ve read stories about people getting an iPhone replaced after breaking it within a few weeks of purchase. That is more than almost any card’s annual fee!
Virtually every credit card offers fraud protection. If someone steals your card or card information and uses it to make purchases, your liability is limited by law. But most credit cards make your liability $0 for this type of fraud.
The disadvantages of rewards credit cards
Credit card rewards are hugely valuable, but it is easy to offset those miles, points, and cash back with expensive charges. Beware of these downsides of rewards credit cards if you carry one in your wallet or are considering adding one.
The biggest downside of credit cards is interest. Some cards charge up to 30% APR, which is a huge expense if you carry a large balance. If you want to use credit card rewards, you should always pay off your balance in full otherwise the interest costs make it no longer worthwhile.
Late and missed payments
If you miss a payment for whatever reason, it is going to show up on your credit report. One random 30-day-late payment isn’t going to make or break your credit score, but a pattern of late or missed payments certainly will. A bad credit score prevents you from being approved for the best loans and credit cards, and if you do get approved might lead to a higher interest rate. For a mortgage, that can easily cost you tens of thousands of dollars.
Credit cards are great for purchases, but you should stick with your debit card to get cash. A cash advance from a credit card typically charges both a one-time cash advance fee and a higher interest rate. Unless you are getting the cash out to keep food on the table (avoiding going hungry) or keep from getting evicted (avoiding homelessness), you should avoid credit card cash advances in almost every scenario.
Foreign transaction fees
If you like to travel a lot, travel rewards cards are a great way to get there. But once you land at your international destination, you should make sure you use a card that does not charge a foreign transaction fee, which commonly costs as much as 3% of the transaction price.
Annual fees are not fun to pay, but in many cases they are worth it. Do the math to compare how much value you get from your card each year compared to the fee. If your annual fee is higher than what you get in return, you may be better off downgrading or cancelling the card. But if you get more in value, annual fees are not so bad.
Find the right balance when choosing how to pay
Credit cards offer more good than bad, if you keep your balances paid off and avoid unnecessary fees. You know yourself and your habits better than anyone else, so be honest with yourself and only use rewards cards if you will diligently keep the balances paid off. If not, they probably are not worth it for you.
If you do find managing your cards to be an easy task, the pros can easily outweigh the cons. It is up to you to maximize the value you get while keeping costs down. If you can do it successfully, you have a big world of credit cards reward opportunities just waiting for you to get started.