Is There a Downside to Credit Cards with Reward Programs

A Credit Article Contributed by Mark Mcclelland

Why Credit Cards with Reward Programs

It's getting so that now-a-days the only way to differentiate between credit cards is by the reward programs they offer. That's because most all traditional credit cards carry pretty much the same kind of amenities, interest rates, services, and the like. It's gotten so that it's only the reward programs that can set one card apart from the others.

Apart form the card issuers need to differentiate their products, there are - among the multitude of offerings - some that can really be fun and beneficial...if you know how to handle your expenses and when to cut the cards loose. For example, some cards may offer a decent cash-back program - say between 3% and 5% - at one of your favorite stores, but the program expires on a specific date. You might want to consider using this card until the reward program expires and then cancelling the card, since the reason you got it in the first place has gone away.

And the rewards credit card industry has gotten so competitive that more than half of all new credit card offerings you're likely to receive in the mail this buying season will tout some "really great" reward program or another that you simply won't be able to live without.

What are the Dangers in Using Credit Card with Reward Programs

Apart from the dangers of using any credit card at all, like digging a money hole for yourself so deep that you can't get out, there're several other gotcha's you might not be aware of:

One is that credit cards with reward programs tend to have fairly high APRs when compared to more traditional cards. A traditional credit card may carry an APR of between 9%-11%, while that same card with a reward program may come with a 14% APR. In addition, if you're tempted to apply for several cards, each with a different reward program, you may actually wind up damaging your credit "score" because you have too many cards.

And the worse risk of all is that you'll buy things you don't need and can't afford simply to get the rewards. It can't be stated enough that NOTHING is free. There is no such thing as free money, and there are no such things as free rewards. In spite of what the reward cards would have you believe, if you put another $1000 on that 1.5% cash-back reward card, you'll pay dearly for that $15 in the long run.... what do you think the difference in the interest rates are for?

How Do You Reduce Your Risk When Using Credit Cards with Reward Programs

Well, first off, limit yourself (OK, your household) to no more than two reward cards. If you use more than a couple of cards you run the risk of not earning the maximum rewards possible - especially with cash-back cards. Second, only get reward cards if you can pay off the balance each month. Remember the interest rate; if you don't pay off your balance the value of the reward will be dwarfed by the penalty you'll pay in interest charges.

And third, don't get a reward card that you're likely to never use the reward... like a card that rewards with miles towards a free airline ticket if you hate flying.

And it bears repeating that the surest way to reduce your risk is to not use credit cards at all.