These days, many consumers are trying to avoid dealing with credit card debt in a number of different ways, including getting rid of some of their accounts to avoid the temptation of spending more. But one type of account that consumers keep even when they cut up their other cards is a rewards credit card. On the surface, this may seem like a good idea, but in actual practice, it might not always work out that way.
Many consumers’ rationale for keeping a rewards card even as they get rid of their no-frills accounts is that in some cases, they’re probably going to have to spend money on their credit cards to afford a necessary purchase, so they may as well earn some cash back, points or miles as a reward for doing so. But what many consumers may not keep in mind is that by doing so, they might be costing themselves money and creating some headaches.
That’s because, unlike cards that don’t come with a lot of rewards or other perks, this type of account typically carries higher interest rates and annual fees that can wipe out the value of the card and even end up costing you money depending on your spending habits. These costs are built into the card to make them easier for lenders to afford, and therefore, borrowers should take the time to do some math and figure out whether their rewards card is actually costing them more money than it’s earning over the course of a year.
Such a card can be particularly problematic for a consumer who tends to carry their debt from one month to the next rather than pay it off in full when the bill comes, as the higher interest rates will tend to cancel out any rewards. But because many of these cards come with annual fees, some of which can be rather sizable, even those who pay their balance off in full every month may end up losing money on the card if they don’t spend enough on it to earn back the fee’s equivalent in points, miles or cash back.
In many cases, consumers will do well for themselves to simply start looking at the true cost of a credit card to determine whether such an account is right for them and their unique financial situation.