Is Your Rewards Credit Card Sending You Into Debt?

Credit card issuers have been increasing the amount of promotional offers as the economy starts to improve and the credit crunch subsides. Billions of offers were mailed in 2010. That means you've probably noticed a lot more junk mail in your mailbox.

Around 80% of those offers were for reward credit cards. They promise you cash back incentives, airline miles and more. All you have to do is swipe a shiny new credit card.

However, it may be smart to reconsider using a rewards card when you pay.

Rewards credit cards typically have a much higher interest rate than credit cards without all the incentives to spend. If you're unable to pay-off the balance each month, it won't be long before any rewards you may receive from using the credit card are offset by the extra money you pay in interest.

You may feel like your rewards credit card helps you to earn money. But the truth is you're probably spending more. The Federal Reserve Bank of Chicago recently conducted a study concerning rewards credit cards. It discovered that people with cash back credit cards typically overspend and end up in debt.

The research revealed that a 1% cash rewards program gives the average user a $25 reward each month. However, swiping a rewards card also leads to an average monthly increase in spending of $68, and debt carried over on these cards averages an increase of $115 a month.

Researchers also say that those who use rewards cards are less likely to pay down existing debt since they are spending more money.

Realize that your points could expire before you can cash them in. Many people forget to use their points before they expire, or the expiration date arrives before they have enough to use on anything substantial. People with credit cards that reward users with airline miles often find there are many stipulations that make it impossible to fly on certain dates or to specific locations.

Credit card companies make most of their money when the consumer goes into debt. They are not in the business of handing out prizes.

People who use a rewards card should remember to read the fine print. There is most likely an annual fee and other charges connected to the card. If the rewards you are receiving are less than the fees you pay, you're only harming your personal finances.

There are some people who have found ways to take advantage of rewards credit cards. The key is making sure you are always able to pay the balance each month. If the temptation to spend is too much for you to resist, it might be smarter to stick to cash and personal checks.

Some rewards cards offer you the chance to invest the money you receive. Instead of getting money to spend, you're cash back incentives are directed to your brokerage account or IRA. These cards often offer higher returns as well.


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Kasey Steinbrinck has written in the television radio and newspaper industries. He now creates web content for Check Advantage, which offers personal checks and business checks directly to consumers.