From airline miles to cash back, reward credit cards can be a valuable tool to manage your money and enjoy perks. Whether you love to travel or just enjoy getting cash back each month, there’s likely a credit card out there that matches your needs and interests. Just using your card for your everyday spending can earn you hundreds, or even thousands, in rewards. When used wisely, you can end up making money instead of racking up debt.
However, some credit cards can be more costly than they are worth due to annual fees and interest rates. Moreover, if you are not careful, juggling credit cards for their rewards can end up leading you into debt; credit cards with benefits are best for above-average spenders with excellent credit. To help you choose the best card for you and manage your finances, consider these six questions before you fill out a credit card application:
1. Will you use the rewards? So many people get sucked in by exciting sounding offers, like airline miles or travel rewards. However, if you are the type of person who loves hanging out in your own city, those rewards can go to waste. Instead of looking at the value of the offer itself, consider its value to you as an individual. If you do not travel often, you might be better off with a credit card that offers cash back on routine purchases.
2. What are the fees? While reward credit cards usually sound great at first, many of them come with annual fees; some can be as high as $100 a year. If you do not use your card often or get many rewards, the cost of the card can be more than its worth. Similarly, some credit cards with generous promotional offers have very high interest rates, reaching as high as 20% to 30%. If you pay off your bill in full every month, the interest rate might not matter to you, but if you carry a balance, you can end up paying a lot more for your purchases.
Never miss a local story.
3. How easy is it to redeem rewards? Evaluate each card’s process to redeem rewards. Some are very simple; your cash-back balance is available to use immediately, regardless of the amount. Others only allow you to use the balance once it is hit a certain minimum, like $50; that can take a while to build up. For cards that offer airline miles, many have blackout dates which can inhibit your vacation plans. Understand the card’s limitations so that you can make the most informed decision possible.
4. Do you have any debt? If you carry debt already, adding a credit card just for the rewards may not be a good idea. Especially if your debt load is high, your credit score may be low, will make it difficult for you to qualify for a card with a low interest rate. You may only be able to be eligible for a limited rewards card, such as a store card, which has low credit lines and very high interest rates. Additionally, reward cards can tempt you into spending more than you intended. You may use the card more, justifying it by telling yourself you are earning benefits. Unless you have established strong discipline and repayment habits, reward credit cards can worsen your financial situation.
5. How often will you use credit? If you are the type of person who budgets your money better using cash, a rewards credit card likely does not make any sense; you will not use it enough to justify the annual fees. These credit cards work best for people who are above average spenders and can afford to pay off their balances each month. By using them for everyday expenditures, including utilities, eating out and entertainment, they can rack up the rewards without spending any additional money. If you are an average spender, opting for a card with a low annual fee and cash back rewards, rather than airline miles, may be the best course of action.
6. Do you have a rewards goal? Many people sign up for new credit cards on an impulse, such as at the store cash register or walking through the airport. However, by being strategic about what your goals are, you can maximize your rewards. For instance, one smart way many people use cash-back cards is to save for Christmas or holiday spending. They use their credit cards for everyday purchases and use the cash-back balance at the end of the year for gifts and decorations. That is a way to use a card wisely and enjoy the holidays without spending any of your own money. Whether you want to save for a big purchase or are planning a dream vacation to Paris, make sure you have a clear goal and that your selected credit card has rewards that can help get you there.
If you are considering opening up a new credit card, you may be overwhelmed with the different options available to you. From travel incentives to cash back promotions, there are reward credit cards available to match your spending habits and financial goals. Consider your financial situation carefully to see if your budget and spending habits warrant signing up for a credit card. No matter which card you choose, maximize your rewards by paying the balance in full and staying within your budget.
LendEDU is a content partner of the Centre Daily Times providing personal finance news, expert commentary and coverage.