Is It Worth It to Get a Credit Card Just for the Rewards?

FT Contributor  | 

Whether you are just getting started in the world of balancing your own finances or are a seasoned banking expert, credit cards can be useful financial tools to have in your arsenal. Having a credit card can help you build credit, which is useful when applying for loans or making large purchases on things like cars and homes. Banks offer rewards programs to entice new credit card customers and encourage their current customers to spend money on their cards.

What’s more, some credit cards offer rewards programs, making them more enticing to consumers. While these rewards seem beneficial, it’s all about using the credit card properly, as using a credit card requires responsibility and proper management. An enticing rewards program might be worth it, but only if you as the cardholder are willing to put in the effort of maintaining the balance on the card.

Before you sign up for a rewards credit card, consider the following so that you’re not just signing up for the rewards, but to make a smart financial decision.

Pay the Card Off on Time and Monthly

Regardless of the type of credit card you have, it is important to pay your card off on time each month. If you can afford to, avoid carrying a balance on your credit card. This will lessen the amount of interest you have to pay.

In addition to maintaining a favorable credit score, making payments on time each month allows you to get the most out of a rewards credit card in particular.  For example, many credit cards offer a rewards program that allows customers to earn 1% to 5% cashback on their purchases, while other store credit cards offer discounts on every purchase.

While cashback is useful to the consumer, a cashback rewards card may have an annual percentage rate (APR) of 15%. If you don’t make payments on time each month, this interest rate could cancel the value of the reward you worked so hard to earn, and in some cases could end up potentially costing you extra. Generally, paying off your balance each month will save you money in the long run, so if you open a rewards credit card, adopt that habit.

Annual or Hidden Fees

Before you open a rewards credit card, it’s important to scour the company’s agreement for any annual or hidden fees. Doing so will ensure you’re aware of any additional charges that may pop up from holding a credit card with that company.

Many rewards credit cards come with annual fees, mostly to help cover the costs of being able to offer you benefits. Some rewards credit cards might also come with hidden fees that may end up equalling or reducing the rewards you receive significantly.

Before signing up with any kind of rewards credit card, make sure the annual fee is going to be worth it. To determine that, consider how much you’ll use the card. Will you use it enough to generate a significant amount of rewards that are valued more than the annual fee? If the answer is yes, that card might be right for you, but if the answer is no, you might want to continue shopping around for a better deal.

Additionally, you should note that some rewards may be taxable. It’s important to understand the types of rewards that can be taxed. Certain rewards are viewed as taxable income, and it’s important to know what kind of rewards are taxed so that you can calculate what you might owe and compare it to the benefit of having that card — especially if there is an annual fee involved.

Make the Most Out of a Rewards Card

It’s important to make the most out of your rewards credit card so that you can reap the value of the card. In order to do that, you should start by finding the card that best meets your needs. Say you travel a lot. Whether professionally or personally, you might benefit from having a credit card that offers travel rewards such as frequent flyer miles or a card that offers discounts on gas. Shop around to find a card that offers rewards that best fit your lifestyle.

Once you’ve settled on the rewards card that’s right for you — whether by shopping around or negotiating for better benefits — you’ll want to create a budget for the credit card. This will help you prevent you from overspending and carrying a balance, which can ultimately take away the value of having the rewards card in the first place. Create a debt payment plan so that you can pay off your balance each month or make payments to get your balance down as low as possible.

When it comes to using your rewards credit card, it’s important to make strategic purchases at places that are going to provide you with the most rewards. In some cases, a rewards card might offer you 1% cashback on every purchase, but 5% cashback on entertainment and dining. When you’re paying for a product or service that offers a higher return on rewards, be sure to use that credit card.

Some credit card companies will offer rewards on different purchases each month. To ensure that you’re aware of their most recent rewards, research the perks offered each month. You should also be in tune with how to redeem your rewards. In some cases, the points you accumulate could expire. Pay close attention to your credit card’s terms of service so that you don’t miss out on the rewards you work hard to earn.

Cancel the Card

If you sign up for a rewards credit card and find that the card is not fulfilling its intended purpose, you should consider canceling the card. Similarly, if you are using the card incorrectly and carrying a balance you’re unable to pay off with increasing interest, you might want to cancel the card.

Whether one of these instances applies to you or you’re simply not using the credit card like you thought you would, it may be best to stop using the card altogether and cancel it once your balance has been paid off. If you have accumulated rewards during the time you were using the card, be sure to reap those benefits prior to canceling the card. In most cases, once you cancel a card, your benefits must be forfeited.

A rewards credit card could be right for you, but it’s important to choose one that will meet the needs of your lifestyle.


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This post was updated January 14, 2020. It was originally published January 14, 2020.