Experts estimate that more than a third of Americans will use credit cards for their holiday shopping and expect to carry the balance beyond January. While not the best financial situation to be in, consumers can reap some benefit by using a reward credit card, if they are careful.
Maximizing your credit card reward begins with the ability to pay off the balance each month. If that isn’t possible, do so as soon as you can to retain more of the value the reward. With interest added every month that you maintain a balance, it will effectively lower the value of any reward you may earn. Carry a large balance for just one month on a rewards card with an annual fee and high APR and any rewards you would earn would be worthless.
The cost of using a reward credit card is often higher than a plain vanilla variety card. There may be an annual fee, a medium to high annual percentage rate and other conditions associated with the redemption of the reward that may make the reward worthless. If the cost of using the card exceeds any potential reward, it’s better to look for a credit card with a zero percent or low APR credit card offer.
The only way to know for sure that a reward card will actually be a benefit is to do the math. This will require a projection of your intended purchases and the terms and conditions of the credit card agreement – information that can be found online or by calling the credit card company. The Federal Reserve provides an online credit card repayment tool for consumers to estimate the cost of borrowing. Once you have all the figures in front of you, it will be easier to see whether a reward card is a good option.
No matter whether you decide to use a reward card or a standard credit card, planning ahead, reading all communications and keeping an eye on your debt will help keep your financial house in order. Plan and stick to a budget and know your limits. Make your payments on time and stay below your credit limit. And always keep in mind that reward programs can be modified or cancelled at a moment’s notice by the card companies.
Have you had great success with rewards programs?