Everybody likes free stuff. I do too, but there is no free lunch in life. That’s exactly how I feel about reward and cash back credit cards. I know people who will charge thousands of dollars per year just to get a $250 plane ticket. Think about it, 1% cash back requires you to spend $5,000 to receive a $50 gift card or check. Seems silly.
Here are some reasons to reconsider these cards.
This is ingenious on the part of the bank issuing the credit card. A small reward to encourage you to carry a balance or to collect those swipe fees. This is my number one reason for not liking these cards. They encourage spending, which can encourage credit card debt. The average American’s credit card balance is over $15,000. The misery of debt can interfere with any well constructed financial plan.
Interest Rate Usually Higher
Here’s where the free lunch part doesn’t hold water. Most of these rewards and cash back credit cards have interest rates that are typically higher. Usually around 2-3% higher to pay for all those rewards you’re getting. Why not just get a low-interest rate card to begin with?
One in four credit cards have an annual fee. That annual fee averages about $50. Ironically, this is the average reward if you don’t carry a balance. Of course, you could always give the credit card company a call and get this fee waived.
You May Not Use the Rewards
I’m not sure what the statistics are regarding unused credit card rewards and points, but many people never use them. There are a variety of reasons, but one would be switching cards before using the points. Another reason is some people just don’t have a lifestyle that fits the type of card they are using.
Look, the main reason that every other credit card commercial is about rewards, is because it is such good business for the bank or card issuer. So that probably means it’s not good for your overall financial health. So the next time a credit card company argues, “but it’s more money”, do what the baby does and throw it back in their face!