What Credit Card Rewards Terms Don’t Tell You

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How do you usually choose your credit cards? When weighing two options, would you be more likely to pick a credit card that offers you an iPad for signing up, or a credit card that doesn’t offer the same perk?

For most people, the lure of the iPad alone is enough to choose (or even switch to) that particular card.

And we see this trend across all types of rewards. From airline miles to cash back, the rewards often dictate which credit cards people sign up for. The “better” the credit card rewards, the more likely a consumer will be swayed to choose it. But the rewards don’t always add up to a good deal. Too often, consumers are misled by companies who promise rewards and then charge unexpected fees later.

This has caused the Consumer Financial Protection Bureau to recently start investigating the practice of credit card rewards, according to Bloomberg News. In the meantime, here are some things to know in order to not get misled by these types of offers:

Why rewards aren’t always rewarding

Rewards have become the deciding factor in whether a consumer will choose a particular card and banks aren’t ignoring the fact. To stay competitive, banks focus on highlighting the benefits of a credit card. Unfortunately, all the dazzle surrounding cash back and mega rewards doesn’t always result in the payoff that people expect.

For example, many rewards cards have an “introductory interest rate” which is at a reasonable level (maybe around 12%). But then the fine print says the interest rate increases (to maybe 25%) after the first six months! Or there could be a stipulation that any late payment automatically results in a “penalty interest rate” of 29%. And that’s not even getting into things like annual fees.

This is how consumers get lured into a tempting rewards card offer and wind up paying too much in fees and interest. These extra costs can easily wipe out any gains you receive from the rewards themselves. And sadly, the written terms of service for these credit cards are often murky at best, which makes many people assume it will be okay — when in reality they should be assuming the worst.

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How you protect yourself from unwanted credit card debt

While the CFPB’s recent interest in this area indicates possible changes in the near future, for now the dangers remain the same. However, you can still protect yourself. Here are some strategies to avoid getting taken advantage of by an unworthy rewards credit card:

1. Read and understand terms before taking out a rewards card

When taking out any credit card, it’s essential to know the details of the agreement. That means reading and understanding the fine print. If you’re unclear (which the research indicates many consumers are), then ask questions and push back on vague answers.

It also helps to do the long-term math. If you have a 2% cash back credit card, you’ll get $40.00 for every $2,000.00 you swipe with your credit card. That’s a lot of spending for a relatively small reward!

2. Don’t carry a balance

Anytime you carry a balance on your credit card you will be accumulating interest. If you’re paying interest on top of your monthly payments, you could very well negate any cash-back rewards. To fully take advantage of rewards programs without hurting your finances, make sure you are able to pay any monthly bill in full so that you aren’t carrying a balance into the next month.

3. Don’t take out a card if you don’t need to

Just because the rewards seem appealing doesn’t mean that they’re worth sacrificing your financial stability. Remember that collecting credit card rewards is a result of borrowing money. It’s one thing if you use the card and pay it off in full every month. But if you’re spending money you don’t have and taking on debt, that’s very damaging. If you don’t need to take on a line of credit, consider your other options before opting into a debt agreement.

4. Plan and manage your payments if you do use a rewards credit card

There are plenty of people out there who will tout the benefits of credit card rewards. You’ll find people who have planned vacations using their credit card perks. However, to see true benefits you have to be diligent in your repayment plan. Think of any rewards as a perk for managing your credit card effectively, not simply using your credit card.

The Consumer Financial Protection Bureau’s attention to studying the effect of credit card rewards programs on consumers is a step in the right direction. And with the tips above, you can continue to protect your finances by avoiding the lure of a free iPad (or any other reward) to convince you to sign up for a card that is not good for you.

Image credit: santorini

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