TV spokespeople are quick to tell you why the credit card they’re shilling is better than the rest. Double points! No blackout dates! No annual fee!
They make it seem so easy to rack up points and trade them in for luxurious rewards ranging from free flights to top-shelf resort stays.
But there’s no such thing as a free lunch, even if you’re earning points on it. Rewards credit cards can wreak havoc on your budget and your money habits as you strive to earn cushy kickbacks.
That’s not to say there aren’t benefits to using these types of credit cards. It’s true that you can earn free travel and other rewards — but you have to be strategic to make them work for you.
Before you apply for that hip new card you’re seeing in commercials, ask yourself these five questions first.
1. Will You Really Pay the Bill in Full Each Month?
If you have credit card debt already, stop reading now and focus on paying that off first.
Dan Miller of the travel blog Points with a Crew said that financial discipline is the key to success with rewards credit cards.
“Make sure you have the ability and discipline to pay off your bill in full each month,” he said. “If you don’t, interest and fees on these cards are going to eat up any rewards you might earn.”
If you are steadfast about following your budget and meeting your financial goals, you’re a good candidate to make the most of a rewards credit card. But don’t let your own confidence fool you.
Scott Rick, professor of marketing at the University of Michigan, warned against trusting yourself to resist the temptation to spend.
“We always plan to have self-control later, but tomorrow becomes today,” he said. “You may know [a card has a] high APR, but you don’t expect that to be relevant to you.”
You need to understand the terms of the credit card offer and be aware of how you intend to use it — not just now, but later as well.
2. What Does That Credit Card Agreement Actually Say?
Did you know the average credit card agreement on file with the Consumer Financial Protection Bureau in 2016 had 4,900 words? Combine that length with unfamiliar phrases and confusing rules, and you may just give up on trying to understand the benefits — and risks — of opening a particular card.
Be sure to read through all the details of a credit card agreement before signing up for two key reasons: First, you want to have a clear view of interest rates, annual fees, late fees, expiration dates and other conditions of use. Second, you want to make sure the benefits of the card will fit your needs.
For example, it would be a waste of time to use a card to earn flight rewards if you can’t actually use the points or miles on your favorite airline.
3. Is There an Annual Fee?
What about those annual fees? Some credit cards require a yearly fee of $50, $100 or more for the right to access their benefits. The American Express Platinum card is one of the priciest, with an annual fee of $550.
But credit card writer Beverly Harzog says annual fees aren’t all bad. “Be sure the rewards you earn are far going to outweigh their fee,” she said.
Many cards waive the annual fee for your first year, and you can always call to ask them if they’ll waive it a second time.
Harzog recommends examining your spending patterns before choosing a card with a higher annual fee.
4. Will the Card Tempt You to Overindulge?
If you get a higher credit limit than you expected for the new credit card you applied for, don’t treat it as an invitation to spend.
Credit limits are a suggestion instead of a warning for many people, Rick said. While you might make a plan to achieve a certain spending requirement to get a sign-up bonus, don’t plan to continue spending up to the limit for your card.
Rick explained that we’re better at planning for future income than we are at anticipating future expenses. “We’re good at ignoring bad news and looking for reasons to indulge,” he said.
5. Is Your Normal Spending Enough to Earn the Sign-up Bonus?
So, what about those big sign-up bonuses? The real value in miles and points is from welcome offers, which earn you far more than the typical 1% or 2% reward, Miller said.
“If you’re just spending naturally on your card, it’s hard to get enough points or miles to do anything,” he said. “You need to be a higher spender outside of those opening offers.”
So maybe you’re not a candidate for that American Express Platinum card that gives you 75,000 points if you spend $5,000 in three months. Maybe the Capital One Quicksilver card that offers a $150 cash bonus after you spend $500 in three months is a better fit.
Remember: You’re not competing with other credit card users or first-class-flying bloggers if you’re just starting out with rewards credit cards.
You’re just trying to earn a few extra perks for yourself.
Want to know more about how signing up for a rewards credit card can impact your bottom line? Find out what happened to three borrowers who sought rewards.
Lisa Rowan is a senior writer at The Penny Hoarder.
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