Potential Pitfalls Credit Card Reward Programs

--What you need to know

Cash. Rebates on gas. Frequent flyer miles. Hotel rewards. Earning perks from simply using your credit card seems like a no-brainer. The 76 percent of consumers who’ve joined credit card rewards programs* apparently agree.

You’ve decided to join the ranks and sign up for a credit card loyalty account. What potential downsides should you watch for when shopping for or using your rewards plan? Consumer credit counselors at our Consumer Credit Counseling Service (CCCS) agency share several considerations.

Small Print

Rewards cards are governed by lengthy terms and conditions. Before signing up, as painful as it may seem, read the terms. Some common provisions of rewards cards to watch for include:

• Expiration dates on rewards. (If you don’t travel a lot but want to save tens of thousands of points for a plane ticket, could your points expire before you have a chance to use them?)
• Ceilings on how many points you can earn in a specific period. With some cards, you stop earning rewards when you exceed certain limits. Will you be limited on the total number of awards you can earn?
• Narrow purchasing categories. Many cards only earn rewards for purchases in certain categories like groceries or gasoline. Cards which earn points in a greater number of categories will help you rack up more points.
• The loss of points earned the prior month due to late payments.
• Restraints on redemption. Some rewards are easier to redeem than others. If your frequent flyer program “blacks out” the holidays that you’re available to travel, you would be better off enrolling in a card that earns cash back.

Increased temptation to spend

As they get some type of premium in return, reward card users are encouraged to spend more by justifying or excusing their expenditures. This added incentive is especially dangerous for those who don’t have control of their spending—be it they spend compulsively or simply routinely charge beyond their means.

Spending on items you wouldn’t normally purchase is the number one danger in using a rewards card.

The Cost

It’s common to pay annual fees for rewards cards. Will the fees outweigh the value of your rewards? If your fee is $75 a year, and you earn one percent on your purchases, you would have to charge $7,500 a year—or $625 a month—just to break even.

To compensate for the cost of the incentives, frequently, reward-earning cards carry higher interest rates and fees than traditional cards. So, most financial experts suggest that if you carry a balance every month, it’s smarter to stick with a standard card.

One Card Risks

If you shift all of your charges to one card to earn rewards, you may damage your credit. Using only one credit card can jeopardize your accounts with other creditors. More and more, creditors are closing the accounts of “inactive” customers. Closed accounts will usually hurt your credit by reducing your available credit line. Similarly, by permitting the balance of your main card to exceed 30 to 50 percent of your credit limit, you’re likely to further damage your credit.

The Importance of Record Keeping

To benefit from rewards programs, you’ll need to keep good records to ensure you:

• Pay on time
• Pay off your balances in full each month
• Redeem your awards before they expire
• Keep your account active to prevent forfeiting your rewards
• Evaluate if you spend more than you did with your standard card

Our Consumer Credit Counseling Service (CCCS) agency, a non-profit organization for more than 30 years, offers no-cost credit counseling with NFCC-certified Financial Specialists. To schedule an appointment, call 888.656.CCCS or start immediately online.

*First Data Competitive Intelligence Consumer Loyalty Study (July 2008)