Rewards cards can provide great benefits – but they can also tempt you to overspend. When that happens, you're more likely to carry a balance and wipe out your rewards with interest charges.
According to a new survey by U.S. News, over half of America's rewards cardholders have carried a balance at least once over the last twelve months. Only 46.6% of rewards cardholders never carried a balance, while 26.2% carried balances more than half of the time – and 19.1% carried a balance every month or every month but one.
What's the effect of carrying a balance? Start by comparing interest rates with reward returns. CreditCards.com lists the average rewards card annual percentage rate (APR) at 17.13%. Most rewards cards provide returns between 1% and 5%.
Consider this simple example – you have no previous balance and rack up $1,000 in rewards-eligible charges in a month, earning a healthy 5% rewards ($50). You pay off half the bill, carry the balance into the next month and set the card aside for that month. At 17%, the $500 carried balance will cost you $85 in interest – far more than the rewards you gained on those charges.
Think that people who frequently carry balances get much out of their rewards cards? All they're doing is slightly reducing the pain of overspending.
Perhaps people just like the feeling of getting anything back from their card issuer – especially if it's cash. Cash-back rewards, or the equivalent reduction on a credit card statement, were by far the most popular rewards in the U.S. News survey.
In the past year, 42.7% of respondents had redeemed cash-back or statement credit rewards. Airline reward redemptions were a distant second at 23.4% – and, in third place, 19.4% of rewards cardholders hadn't redeemed any rewards at all.
How do people choose their rewards card? Most survey respondents (22.9%) considered not having an annual fee to be most important. Rewards rates were the second most important factor (17.7%). Only 10% of rewards cardholders considered APR as the primary deciding factor – a bad sign, given that so many people regularly carry balances.
We don't put much time into our rewards card choices, either. According to the survey, 44% of respondents did no research on rewards card options, while another 32% spent less than an hour researching their choice. That means over three-quarters of Americans probably spent more time scrolling through their Netflix options than they did deciding on a rewards card.
Do we at least follow up on our choices after we've made them? Not according to the survey. Over half of respondents compare rewards card offers less than once every three years. If you want more credit, check out our list of rewards credit card offers.
The survey reports significant overspending. One-third of respondents admitted making purchases that they wouldn't have made with cash or debit cards just to earn rewards (and those are only the people who admit it and aren't rationalizing bad decisions).
Rewards cards can be great if they're used wisely. They can lead to overspending if used unwisely, or if you don't put much thought into your card choice. To get the most out of a rewards card, the card rewards should match your spending habits while minimizing potential downsides (interest charges, fees, redemption difficulties, etc.)
Choose a rewards card if you keep your spending under control and rarely carry a balance. Otherwise, you should focus on finding a card with the lowest APR – and improving your credit score to make you eligible for even better interest rates in the future.
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