Why Reward Credit Cards Might Not Be Rewarding for Everyone

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Reward credit cards may not always be the jackpot they seem. Learn how to navigate the perks wisely. [[{“value”:”

So, you’ve got a rewards credit card tucked in your wallet, thinking you’re about to turn your regular ol’ spending into a treasure trove of points, miles, and cash back, right? Well, hold onto your hats because it’s not all sunshine and rainbows in the land of reward cards.

According to a Wells Fargo study, 71% of Americans have a credit card that earns rewards and 49% of individuals who use these types of cards use them to offset some of the costs of everyday purchases. So, you’d think using credit card rewards would be an easy call. But here’s the kicker. Household debt in the U.S. ballooned by a staggering $800 million from 2022 to 2023, so it’s clear we might be missing a piece of the puzzle.

The illusion of free money

At first glance, reward credit cards appear as modern-day alchemy, turning grocery bills and gas fill-ups into cheaper flights and fancy dinners. But we’re still in major debt as a country. The notion of spending to save can lead consumers down a slippery slope, where the pursuit of points trumps fiscal prudence. Richard Barrington, a financial analyst for Credit Sesame, says, “If you have good credit, reward cards can be a boon. But if your credit’s on the rockier side, the costs might eclipse the benefits.”

The hidden costs of chasing rewards

Let’s cut to the chase: reward credit cards are far from a financial charity case. Every tap, swipe, or click pads the pockets of card issuers through interchange fees — a hearty “thank you” from merchants for the convenience of digital payments. With whispers of capping these fees to ease the burden on small businesses, it raises the question: will consumers end up footing the bill through higher costs or diluted rewards? This scenario highlights a stark reality: Card issuers always have the edge in credit card rewards.

Dig a bit deeper, and the allure of chasing rewards reveals its true colors. It’s more than just the immediate hit to our wallets via fees or less generous reward offerings. The real cost seeps into our spending behavior, subtly nudging us to spend more with the promise of earning more, distorting our financial priorities. Ultimately, the quest for rewards needs a reality check: are we really winning, or are we just playing into the hands of those setting the rules?

The fine print matters

Ah, the fine print, that tiny text we all love to ignore, right? But for reward cards, those seemingly innocuous details are where the magic — or the mayhem — happens. It’s not just about how many points you rack up; the real game changer is how you use them. And oh boy, does that road have its share of potholes, from the joy-killing restrictions and expiration dates to the high hurdles you have to jump for redemption.

The mantra here is simple, yet it’s so easy to overlook. Those rewards are only really rewarding if you’re the type who zeroes out the card balance every month. Miss that mark, and any hopes of benefitting from those points get gobbled up by interest charges faster than you can say “cash back.”

Suddenly, you’re in a spot where you’re forking out more money in interest charges than any reward could cover, making you wonder why you didn’t just stick with a straightforward, no-frills credit card in the first place. So, while the promise of rewards can be enticing, it literally pays to read between the lines and keep your spending in check.

Smart spending tips for using reward credit cards

Getting into the world of reward credit cards feels a bit like entering a maze — exciting, but a tad overwhelming. Don’t worry; steering through it without messing up your budget is doable with some simple strategies.

Check your spending habits: Understanding your spending habits is critical. The secret is to select a card that complements your existing spending patterns, rather than one that entices you to make unnecessary purchases for the sake of earning points.Don’t splurge: Use your reward card as a tool for payment, not as a license to splurge. Before making a purchase, ask yourself if it’s necessary or if you’re simply chasing after points.Find the right fit: Reward cards aren’t one-size-fits-all products. They should match up with your bigger money plan. If it feels like too much hassle to chase after rewards, sticking with a more straightforward card is okay.Sometimes simpler is better: If figuring out how to maximize rewards feels too much work or it’s tempting you to spend more, consider returning to basics with a straightforward credit card.

Remember, reward credit cards can be an excellent way to get a little extra from your regular spending, but they’re not a shortcut to significant savings or free money. It’s all about using them to fit your lifestyle and personal finance goals. The real win is using them smartly, so you are better off, not in a money pit.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.

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