Rewards credit cards are everywhere. All major vendors have at least one type of credit card rewards to offer to their customers and the majority of them have multiple cards. It is very likely that as a credit user, you have a rewards card, and with good reason. Rewards cards are a great option for most consumers, whether you use this card to buy gas or groceries, or to pay monthly bills. You can collect money for all the expenses you make.
What is the trap?
At first glance, rewards credit cards seem foolproof. All you need to do is charge the purchases you would normally make to a credit card that gives you some form of reward. Generally, this is money, points that can be redeemed for certain products, Air Miles or Aeroplan Points. However, when you apply for too many cards and you buy things that you can not pay with money, you will be faced with serious debt problems. Let’s take a look at some of these issues that can be generated when reward credit cards are not handled properly.
Opening too many credit card accounts
The credit card companies like to offer you perfect scenarios with their reward cards. Travel more, be rewarded for your expenses, and have access to new offers and new products. All this is great and if you travel a lot, a credit card that rewards you in AirMiles or Aeroplan points is definitely a great option. However, if you do not travel, you would open a useless credit card account. In addition, opening too many credit card accounts in a short period of time can have a negative effect on your credit rating. Every time you apply for a credit card, the provider conducts a credit check. This type of credit check has consequences on your credit rating. This means that your credit rating will drop by a few points and the survey will show up on your credit report for up to two years. So, if you apply for multiple reward credit cards over a short period of time, your credit rating will decrease with each credit survey performed.
It is important to note that this may not be a big problem for many consumers, but for those looking to have a mortgage or a high loan, several consecutive credit inquiries may hinder your ability to approve.
Spend money you do not have, to collect more points
Rewards credit cards can provide you with the perfect excuse to spend money you do not have for the simple purpose of collecting extra points. The temptation to spend simply to accumulate travel points that you can not afford or to purchase a set of pans you do not need can be very strong. The best course of action you can implement when it comes to using credit card rewards and not changing your spending habits. Make normal use, whether it’s groceries, gas, or utility bills. Do not start shopping more often to collect more points.
High interest rates and annual fees
Because of the nature of these credit cards, they are not free or cheap. This is probably one of the misconceptions people have about rewards cards. The credit card companies want us to believe that we are really going to get something for free by simply buying with our credit card instead of paying directly with money. The problem is that reward cards often have higher interest rates and almost always come with annual fees. This means that if you fall into the trap of a purchase that you can not repay in full on your credit card, not only will you pay for the item but you will also pay a high interest rate and annual fees. Thus, if you do not clear your balance each payment period, the items you buy will become very expensive.
Forgetting to use all the points you have collected
One of the most unfortunate things that can happen with a rewards credit card is to forget to redeem the points that you have so badly collected. If you have decided to make more purchases with your credit card to have more points, you should have a plan for these points. Rewards credit cards are excellent, but they must be used responsibly to truly enjoy the rewards. Consider your options, your lifestyle, and your spending habits before asking for more credit cards simply to collect more points.