Full Guide To the Pros and Cons Of Rewards Credit Cards

Editorial Note:

There are a lot of rewards credit cards out there. It’s all too easy to apply for a credit card that may not be right for you. If the credit card perks sound amazing, you’ll start fantasizing about all the ways you can make use them. Yet, you may not stop to think about the impact this card may have on your finances. Therefore, it is crucial for you to review the pros and cons of rewards credit cards. Once you have a better understanding of the advantages and disadvantages, you can make a more informed decision.

Pros Of Rewards Credit Cards

Credit Cards with Rewards

The pros of a rewards credit card are what make the program exciting. They allow you to earn benefits which can be used for shopping, travel, or to earn a little money. They include:

1) The rewards program itself

Your credit card can earn you cash back, points, or miles, which can be redeemed for other benefits. With the rewards program, most of your purchases may qualify.
In some cases, revolving categories purchases (purchase of a certain type) earn rewards while others do not. You can potentially earn hundreds of dollars in cash back, travel, and other rewards for redemption later.

2) Sign-up bonus

Rewards credit cards usually have premium bonuses. They require you to spend a certain amount within an introductory period. If the spending threshold is around the amount you planned to spend, the bonus can be easily met. The most premium cards offer up to 150,000 bonus points. When converted to travel benefits, this is worth thousands of dollars. It’s more common to find cards that offer 40,000 to 75,000 points. This is usually enough for a pair of domestic round-trip flights or a single round trip from the U.S. to Europe.

3) Travel, shopping and protection perks

Some of the best purchase protection opportunities come from rewards credit cards. Rewards cards may offer travel accident insurance, baggage insurance, free Global Entry, emergency cash replacement, and other travel perks. They give extended warranty insurance, purchase protection, and fraud protection that limits your liability when your card information is stolen.

4) Fees are waived

Credit cards make money from interest and fees. With rewards cards, the card company may waive some of them, like foreign transaction fees. Cashback cards frequently have their annual fee waived for the first year.

5) Build credit

Rewards credit cards are a good way to build your credit if you use good credit behavior. Pay off your bill every month and keep low utilization. You’ll be on your way to great credit in no time.

Cons Of Rewards Credit Cards

Cash Back Cards

On the other hand, rewards credit cards can have some disadvantages that may make them not worth it. You can damage your financial situation if you’re not careful. The cons include:

1) Very good credit score needed

To earn rewards, you usually need to show you’ve been responsible with your credit. (There are a small number of credit builder rewards credit cards available.) If you’re applying for a rewards card, you will want to make sure you have the required credit score otherwise you would have dinged your credit score for nothing.

2) High interest rates

The interest rates of rewards cards are generally higher than non-rewards cards. A 20% APR can be a great motivator to pay off your balance in full every month. Pay attention to credit cards that offer low introductory rates that increase sharply after time. Interest costs quickly eat into any benefits you may get as rewards.

3) Expensive annual fees

If you’re lucky, the credit card company may waive these fees. Provided they don’t, you’ll want to do the math to see if the benefits you’re getting is worth the annual fee. Also consider, if they are worth it, will you use them enough to justify the cost?

4) Lost time dealing with managing the benefits

If you have a card with rotating categories, you need to spend the time chasing categories to maximize the rewards. This quarter it may be schoolbooks and clothing, but by Thanksgiving, it may be travel costs. Then there is the time lost maneuvering around blackout dates. You’re trying to rearrange vacation days and schedules so that you can finally use your travel rewards. Flight rewards may not be used on holiday weekends or from December 15th until a week after New Years Day. You may be limited in which airlines, hotels and rental cars you can use. If this sounds like too much of a hassle, consider flat-rate rewards card, which offers less time-consuming rewards.

5) Rewards limitations

Pay attention to the fine print in your credit card agreement. Some credit cards place maximums on the rewards you can earn. Other cards may force your points to expire, or not allow them to roll over to the following year.

6) Can ruin your credit

You should have a card that gives you the best rewards with balances you can comfortably manage. By “manage”, we mean pay off in full at the end of the month. Your credit is affected by several factors, including your payment history and your utilization. If your rewards card is negatively affecting either of these factors, your credit will suffer.

7) Potential to bust your budget

You planned to spend a certain amount on your card, but you spent more to reach the rewards. If you’re using more money than planned to earn benefits, your card may not be as valuable as you perceive it to be.

Avoid the Cons Of Rewards Cards

Reviewing the pros and cons of rewards credit cards is a solid strategy to assess a card’s benefits. You should keep in mind that it’s possible to avoid some cons of reward cards. It takes the same good credit habits we always recommend. Pay your bill on time and in full every month. Keep your balances low. Spend only what you’ve planned. Protect your credit score. Pay attention to interest rates. Read the fine print.

Roman Zelvenschi

I started a digital marketing agency Romanz Media Group Inc. 12 years ago. Running my own business quickly taught me the importance of cash flow. Making sales was not enough, I had to have money in the bank to pay the vendors, staff and personal bills.

During those early stages of the company I learned how to get creative with debt and to save on interest cost. I paid for everything I could with a credit card to both get more points and to extend the payment date by 25 days (credit card grace period). I then utilized a 0% balance transfer offers to rotate this debt.

I learned a lot during this process and made a lot of mistakes. My key lesson is that the most important part of being financially independent is how much I managed to save, rather than how much I earned. Staying disciplined with savings and tracking spending is not easy and I tried many different methods to stay on track.

FinancialFreedom.Guru is a side project where I and my staff are trying to share the practical knowledge on how to understand finances and to build wealth.

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Jayne.M
Jayne.M
2 months ago

Rewards cards like flybuys they are worth having because you’re spending the money anyway so why not get rewarded for your loyalty. I’m not sure about credit card rewards because I’m not stupid enough to spend more than I can afford

SteffRoe
SteffRoe
2 months ago

If your spending habits don’t change and you still get some benefit from it, then it’s perfectly fine to have rewards cards.