Rewards used by credit card companies to entice new customers to apply are effective promotions that provide small benefits. While they may be beneficial for those who are wise enough to balance the rewards with the overall costs, credit card issuers know that many of us have an inclination to impulsively jump at the chance to get what appears to be something for nothing without discernment. That’s why a word of warning is important.
In the same way that millions of people invest in get-rich-quick schemes on the internet only to find out that they’ve been duped and their money is gone; credit card promotions have terms that may negate any possible benefit and even hurt your credit. The danger of being lured in by a gift card, reward points or immediate discount on a purchase can mean heartache when unsecured debt piles up for the sake of future rewards.
Why Reward Perks Come Last
While there’s no doubt that these types of promotions are attractive when you’re looking for a new credit card, they should be the last consideration before making the final decision. Instead you should first focus on factors that will affect the cost of borrowing, i.e., APR, penalty rates and fees. What good is a reward of 3% on purchases, for example, if you end up paying huge amounts in interest and fees?
Marketing agencies use our human tendency to strive to get something for nothing to generate new customers. Two terms describe the potential disaster cardholders may find themselves in when a credit card is used exclusively to earn rewards.
- Purchase Acceleration: Working toward a specific reward spells disaster for many cardholders. A number of studies found that consumers accelerate toward rewards (in terms of timing, quantity, and persistence of effort). They tend to spend more on credit the closer they get to redeeming a reward; often on frivolous purchases and without regard to their ability to pay off the balance.
- Discount Mania: This is the misconception that a promotional discount at the register will save money. There are three reasons this logic fails. First: You may be tempted to buy things you wouldn’t have otherwise considered and end up paying interest when the bill comes due, which negates any savings. Second: The items you purchase will eventually go on sale (as most merchandise does) often at a higher percentage discount than the promotional rate provided. And third, the interest rate for store credit cards is generally much higher than a bank- issued credit card, which means you’ll be spending more on that ‘discount’ purchase than if you had used the card in your wallet, if you carry a balance.
The Fine Print
It’s easy to turn a deaf ear to the suggestion to read the fine print, but there’s NO better advice to follow to protect against surprises down the road. Consider one simple fact: a zero-percent APR balance can easily turn into one that incurs upwards of 29% following one accidental late or missed payment no matter what the reason. So it’s imperative that you know the following rates before opening a new credit card account:
- Credit Limit
- Annual Percentage Rate (APR) for purchases, transfers and cash advances
- Annual fees, if applicable
- Penalties for late and missed payments
- Balance transfer and cash advance fees
Once you’ve determined the terms of usage that work for you, then you can look for offers that provide perks that may be a benefit. Maybe you like to travel; check out travel reward cards. Or get cash back on all purchases and bonus rewards for gasoline purchases or other specific categories. Just remember to keep this aspect of choosing the right card secondary to the fine print and terms. Bonuses and rewards are nice extras to be enjoyed but should never be the main reason for using a particular card.