Many consumers are enticed to open up a credit card account with a rewards program with the lure of earning cash back on their purchases, points that can be redeemed for various types of rewards and more. Different credit accounts offer different types of rewards programs, and some people open up accounts to earn specific rewards. For example, some may open up an account that gives them airlines miles so that they can travel and explore the world on a dime. Other programs may allow you to choose from a wide range of rewards. For example, you may redeem your points for cash, but the next redemption may be used to get a new coffee maker for the kitchen. As beneficial as these cash back credit cards sound, many people speculate that they may not be worthwhile and that they may even cost you money in the long run. To determine if these programs are worthwhile for you, consider a few key points.
Purchases That Earn Rewards
As a first step, consider which types of purchases will earn rewards points. With some credit cards, all purchases may earn some points, but some types of purchases may earn more points. For example, making purchases at certain stores may earn you double or triple points. After considering which purchases will earn points that can be redeemed for cash, merchandise and more, consider your average monthly charges to the account. One a piece of paper, write down how much you charge per month, the typical payment you make on your account each month and the typical points you earn in a given month.
Next, consider if you are able to pay your balance off in full each month. Any charges that are not paid in full each month will accrue interest, and it is important to note that this is a charge that will continue until the balance is paid off. The cost of using your cash back credit card equates in part to the cost of your interest charges each month. On that same piece of paper, right down your monthly interest charges. Keep in mind that even if you currently stop making charges beyond the amount of your monthly payment, a balance that carries forward will continue to accrue interest charges.
Annual Fees and Other Fees
You should also consider the annual fees that are being charged to you. Most rewards cards have an annual fee that is assessed simply for the luxury of having an account opened. This means that regardless of how often you use the account, you will still have to pay this fee. Write down the annual fee for your card as well as other account fees that you may pay. For example, if you occasionally make your payment a few days late and accrue a $25 late fee several times per year, this should be added to your list of credit card-related expenses as well.
Limit on Rewards
Now, you have a list of your total costs related to the credit card as well as the average number of points you earn per month. This should give you a fairly good idea about how many points you can earn in a given year so that you can compare the benefits of the card against the costs. However, there is one additional point to consider first. Many rewards programs have a limit in place on the amount of cash or points that can be earned per month or per year. If you are not aware of this detail with your own account, consider calling your credit card company for more details. These upper limits should be taken into consideration when you determine if your rewards program is truly worthwhile to you.
The Value of Prizes
After you have determine how many points you may earn through your rewards program based on your monthly usage as the upper limits in place, consider the value of the prizes you may earn over the course of the year. This is a step that most people fail to take, and it can be truly eye-opening. What dollar amount in charges do you have to make to your card to earn $100 in cash back rewards or in merchandise of a similar value? How many months would it take you to reach that amount based on current spending habits? Based on your usage and the limits in place, what is the actual monetary value of the rewards program to you?
Reconciling the Numbers
As a final step, consider reconciling the actual value of the rewards program against the cost on a monthly or yearly basis. Those consumers who make an effort to pay their balance off in full each month and who do not carry a rolling balance from month to month may find these cash back credit cards to be useful. However, this is only if they have low annual fees and make payments on time to avoid late payment fees. If you do not meet these criteria, you may be surprised to learn just how expensive your rewards program actually is to you. In fact, you may be better off focusing on reducing your credit card balance to save money in interest charges rather than maximizing charges to earn scanty rewards points.