I talk all of the time about debt and not having credit cards. It seems when I make this statement, the immediate response I get back is “But why not use them to get the rewards?” I personally don’t understand where that makes owning a credit card a good thing – rewards or not. However, I wanted to give it a good shake and see if I was overlooking something, so I took a look to see what I could learn.
The first card that I checked out was Capital One Rewards — mainly because those commercials are pretty clever! I looked around it it seems that for most of the “Best” rewards you need to have excellent credit (but this is not defined as to what they are looking for). Regardless of that, they do offer cards which offer frequent flier miles or even actual cash back. If you do not have excellent credit, you will have to pay an annual fee of $39 for their card. There is no clarification as to what they define excellent credit on their site, so I can’t even tell you what they will look at. That honestly makes me wonder if anyone really gets the card without a fee (they probably do, I just see nothing disclosing the parameters).
The second thing I noticed is that they offer 0% APR for one full year. If you transfer your balance, you will pay anywhere from 12.9% – 20.9% (depending upon the card and the length of time that lapses between the time you transfer and one year). That rate can get pretty steep and end up costing someone a lot more than they intended.
As I looked more closely, I wanted to determine what type of reward one might receive from this card. The card pays 1% cash back PLUS a 50% annual bonus on your cash back. Let’s just say that you charge $500 a month on your card. You are diligent in paying the card off every single month so that you accrue no interest. In one year, at 1% cash back, you would earn $60 plus a bonus of $30 for a total of $90 (if you have an excellent rating you would also receive a $100 bonus). Out of this $90, you might have to pay the annual fee of $39 – which makes a net earned for the year $51 (or just $4.25 a month).
Now, if you happen to not pay off the card each month, you would begin accruing interest — at the rate listed above. Sadly, this is what more and more people do. They will then have used up their entire cash back to cover interest PLUS pay even more to the credit card company — all just to get a “reward.” They get nothing. All they get is deeper into debt.
I also took a look at Discover. They offer 5% cash back…….just on select categories. These can change during the year. Now, it was unclear on the site if they notify you if these change or not. If you don’t purchase within these categories, you earn nothing until you spend $3,000 annually – at which time you start to earn 1% (which 1% of $3,000 is only $30). You can also earn .25% on any warehouse purchases up to $3,000. One thing that is very important to note is that the purchases made at warehouses, or through the 5% categories, will NOT count towards your $3,000 purchase to earn 1% cash back. Are you as horribly confused as me?
So, now, onto the GOOD thing about rewards. If you are amongst the minimal percentage of Americans who actually pay down their credit bills every single month (carrying a zero balance and never paying interest), then I can honestly see where you might like to continue using them. They really could end up being a true reward for you. If you do pay it off and make it worth that is great.
The BAD thing is that it seems that the offers can be confusing and misleading. When you see Discover pays 5% cash back, you sign up thinking you will earn 5% on your purchases – when you may or may not. It is also so sad as many just do not pay down the balances in full each month. At 12, 15 or even 20% interest, this continues to push them further and further into debt. They feel like they are drowning (and I would know as I have been in this situation myself).
I just don’t think that a simple reward that you may or may not receive is enough reason to sign on the dotted line. It seems that credit cards were created to bring instant satisfaction to some. So many have forgotten about the “work hard and earn it philosophy”. We constantly have images of things that “we can’t live without” flashing in front of us online or on television. It makes people feel they are missing out and they need to spend. It drives me crazy!
Why do I nor like them? They cause families to live beyond their means. They make people think they have the money they don’t. The rewards taunt people in and just don’t always work as the commercials and ads claim that they do. Yes, I realize that this holds true to many things in life. I just think that earning an extra $5 a month is not enough reward for me to sign on the dotted line. I live by the mantra that if I can’t pay for it in cash then I just don’t need it. And the funny thing is, since I’ve stopped using credit cards and spending, I am happier with less. Go figure!!
Raymond Schlee says
The key with credit cards and rewards program is to be responsible, not spend beyond your means. Me, I have numerous credit cards, and I keep a sticky in my wallet taht tells which card to use for what. Takes 5 minutes to do every three months, and makes using reward credit cards super easy.
Also, in answer to one of your questions. Every credit card that I have notifies you of the upcoming 3 month promotional period (i.e., when you get 5%), and I have credit cards from a few different places.
In my money, free money is free money, whether it is $5 or $5,000, but the key, as you said, is responsibility. So if you don’t think you can be responsible with a credit card, then stick with debit or cash.
The Deal Mommy says
Thanks for explaining in detail while you feel this way. I agree that those who are tempted to run up a balance are best served without. However, I must disagree about rewards in one category: travel. The sign-up bonuses on a card such as the Chase Ultimate Rewards are much more than $51 a year. For instance, for a $95 fee, you get 42,800 bonus points, worth $400 in cash or much more than that transferring to travel partners such as United or Hyatt. One of my readers got over $1200 in value from her sign up bonus with no increases in her daily spending: http://thedealmommy.com/loyalty-points-in-action-how-bonnie-saved-1291-on-a-10th-anniversary-to-remember/
Mike Fischer says
There are so many types of reward credit cards that many people are tempted to try them out. Before doing so, however, you may want to consider the pros and cons because just as there are excellent reasons to get excited about rewards cards, there are also good reasons to be wary.
Twitter: @unocardealers
Rebecca says
I have a Gymboree credit card because it saves 5% on your purchases there and you earn 1% from any other purchases. We use it to pay all bills that we can, i.e. cable, electricity, insurance, etc. as well as gas and day to day expenses. I usually pay it off every week, so that we don’t think we have more money than we do. I have had it for 5 months, and have earned over $100 in giftcards to Gymboree (my favorite store!) with no fees and no interest paid.
I also have the Target, Lowes, and Firestone cards all because they offer discounts if you use your store card. I simply pay it off immediately at the store or when I make my weekly payment to the Gymboree card.
It is all a matter of responsibility. When my husband and I married 3 years ago, we had nearly $15000 in debt, besides cars. Now, we are down to about $5000, which will be paid off within about 8 months, if not sooner. We learned from our mistakes with credit cards and are now happily taking all we can from them now!
Cj says
Just wanted to say that discover states clearly what the 5% is for the month. Also having a credit card shouldn’t make you feel you have money. anyone stands over them making them use that card. Capital one is the worst credit card company out there. They try to make you incur fees etc etc.
Travis M says
I personally find credit cards to be fantastic and I pay for everything I can using them. I’ve earned thousands in rewards since I started using them 5 or 6 years ago, plus they provide a nice safety net in case of major financial hardships. I think everyone should have a least one rewards card that they don’t carry a balance on so that they can earn rewards. Also it is nice to have the added benefits that go along with buying something with a credit card like extended warranties and purchase price protection.
Debt Free without Credit Cards says
It is a proven fact that people spend more $ when paying with credit card than with cash. The credit card companies know this. They are not going to lose money giving you “cash back” or “rewards.”
Read this from Dave Ramsey: http://www.daveramsey.com/radio/highlights/?urlVars=2011/11/2/A-Frank-Discussion-About-Credit-Cards
Bottom line: Use cash, you’ll spend less and have more in your pocket.
Angela says
The 5% cash back at Discover is really a great deal. I use it for hotel stays as I can often earn the 5% on those. I actually used Shop Discover and booked our vacation hotel stay through the site. I ended up earning about $50 in rewards from the hotel stay. For The winter quarter, the 5% cash back includes online purchases. I make a lot of those for the holiday anyway, so I may as well earn extra from it. You can redeem your cash back for partner gift cards that offer a bonus as well (redeem $20 for a $25 gift card, etc.)
Kelly says
I also want to chime in and say that if used responsibly, credit card rewards can be a huge benefit. We’ve had a Bank of America card that we use for everything (except Target, where we get our 5% discount for using their card) since 2003 and have gotten a new set of dishes from Pottery Barn, $250 from Eddie Bauer, a beautiful heirloom dutch oven from Williams-Sonoma, etc over the years. All without a cent paid to interest or an annual fee. We simply pay our balance each month and have never made a late payment. We are on a strict budget and don’t accrue points fast, but over the years they do add up. I don’t even pay attention to what points I get because it’s all just icing on the cake for us. I agree that credit cards aren’t for everyone, but if one can live within their means and spend responsibly – there are rewards to be reaped. Literally.
Cassie says
I agree with most of your reasons. Really, the only good reason to get a credit card is if you pay it off every month. I am a mystery shopper and use my credit card all the time to make the required purchases. I go home and immediately make a payment. I also use my credit card to buy things I’m going to buy anyway, like gas, groceries, and some bills and then I be sure to pay it off right away. So, I do get the rewards and it does pay off for me. Getting a credit card for the rewards definitely doesn’t pay off if you don’t pay it off every month. Thank you for your insight into this.