Are Rewards Credit Cards Right For You?
Today's credit card market is a crowded place. It seems that no matter how many millions of people carry multiple cards, there is a constant competition among the various card companies to attract new consumers.
This has led to the concept of the rewards card. While anyone can appreciate piling up airline miles and discount gas, there is often a hidden cost to the rewards, as well as a sometimes subtle alteration in spending habits.
Credit card rewards programs are immensely popular. In fact, over 80% of credit card purchases in recent years were made with rewards cards. However, it is debatable whether or not using such cards is worth it in the end. Because these cards often charge higher interest rates and annual fees, many times it would be easier and cheaper to simply purchase the reward on one's own.
Carrying Debt
This is especially true for the 60% of card users who carry debt each month. The amount of interest charged on a revolving balance almost always offsets or exceeds the value of whatever reward the buyer gets. The fact is, people who carry debt are better off choosing a card based solely on the interest rate.
Purchase Acceleration
Less easy to detect and quantify than interest rates or annual fees, there are behavioural effects produced by the use of rewards cards. One such effect is known as "purchase acceleration," or the tendency to increase spending the closer one is to getting the reward. A person is much more likely to buy an unneeded item when a reward can be seen right around the corner. Many card companies will take advantage of the tendency, sending letters or e-mails to alert the cardholder of the proximity of the reward.
In addition, the pursuit of rewards often leads to increased debt since the consumer will feel less guilt about increased spending since that spending results in getting something free in return. Of course, the increased debt incurred by such behaviour results in higher interest charges, which in turn further offsets the cost to the card company of the reward.
So Who Can Benefit?
So, given the foregoing considerations, is there anyone who can truly benefit by using reward cards? Indeed there is, though it is almost certainly not the typical user of these cards. The person who truly does get something for nothing is the one who pays off his balance each month, avoids cards with annual fees, and can resist the temptation of purchase acceleration. If this is not you, then your best option is still to select the card that offers the lowest interest rate.
