The latest consumer and financial trend reports are showing that the American public has a favorable view of the state of America’s credit health. Following the rocky years termed the Great Recession, the American wallet has seen its insides feeling fatter and more full, as the economy has begun to climb back towards positive numbers. The financial security that many are starting to enjoy has had an effect on the credit industry, with the national FICO score average hitting an all-time high of 704. While this is still some a ways off from the excellent FICO range of 800-850, the trends are showing that more people are getting close to prime-lending categories than ever before. While this is good news for those looking to buy a house or purchase a new car, there is a word of caution to be heeded. With more Americans qualifying for lending, there is going to be a more concerted effort by credit card companies everywhere to secure a new consumer base. In order to do so, reward cards and loyalty programs are going to be the marketing ploy of the future. Even in the midst of earning things like cash-back bonuses and free hotel stays or travel discounts, it can be one of the fastest ways to drown in debt and tank your credit score. If you want to stay on track with your credit health, consider these tips for avoiding credit card traps.
Reward Cards Encourage More Spending
There are dozens, if not hundreds, of studies that show the tendency of consumers who swipe plastic overpaying with cash end up spending more money. The psychological struggle associated with handing over cash is partly to blame, but the safety of spending a little bit over your budget and having it covered when checking out with a cart full of groceries minimizes some of the stress associated with spending limitations. However, if you add to the mix a credit card that rewards spending with bonus points, there is a whole new level of potentially unhealthy motivation that has been added. Whether you look at it or not, a little bit extra here and there can quickly blow your balance and habits out of proportion.
Interest Rates and Late Fees Nix the Benefits
Be honest with yourself for a moment. The credit card company does not want you to have a bunch of free points and benefits. They want your money. When you are carrying over a debt balance from month to month with your credit card, you really don’t get any cashback benefits when you factor in the APR you are paying. You might have started paying your balance each month, but the temptation to keep earning cashback might have made the difficult now. The average reward card is also going to have a higher interest rate, making it less likely that you will actually benefit from the cashback incentive the company offers.
Rotating Categories and Requirements Leave You Scrambling
Some cards offer much better benefits, but if you read the fine print on the card or the rewards program, there are certain categories of purchases that offer larger rewards or extra cashback. Some companies also require minimum purchase amounts to earn extra funds. If you have always planned out your spending, then one of these rewards cards may be right for you, as you get the most cash back for your budget. You still need to consider if the interest rate is worth what you will be spending your money on, with or without the cashback.
Monitoring Your Own Rewards is Exhausting
Whenever you make a purchase with your rewards card, the transaction is automatically categorized. If the purchase doesn’t fit into an established category, you may not reap the benefits of cash-back. This is most often seen with grocery and gas purchases. The larger retail or chain stores or companies are usually categorized correctly, but local or smaller stores will not be recognized and the transaction left unaccounted for. This can eat at your cash-back potential. Prior to your purchases, you need to research the credit card company’s recognized account and shop or fill up your car accordingly. This could impact your ability to get the cheapest rate for gas or other items, which could then make the cash-back potential a moot point.
Cash Back Doesn’t Always Mean Cash
Although a lot less common than it used to be, some companies offer your cashback by way of redeeming your funds at the company’s gift card store. However, most major credit opportunities are coming with a cashback that is either used as an account credit or it is a financial amount deposited into your bank account. There are sometimes hidden rules on when a distribution is allowed, such as a certain dollar amount, or notes about the expiration of cashback.
Hitting a Maximum Curbs Your Benefits
For companies offering the highest in cash-back opportunities, a maximum reward cap might be involved. It could be based on spending with certain categories or it could deal with entire amount of cashback you have earned. Maximum thresholds for earning areas usually capped between $1,000 and $1,500. Even with a cap, categories like gas or groceries can be a huge benefit to the cardholder. You just need to make sure of any restrictions or limits before you invest in the card or the purchase.
Changing Terms Reduce Benefits
Although a company has limited ability to change your terms without notice, they are able to move you from one cash bac program to another with reasonably little notice. Therefore, the benefits you are receiving could change at any time. The credit card companies react to the market forces around, changing programs and incentives to keep up with competition or altering consumer-positive benefits to make the deal more favorable to the card issuer. Fortunately, most credit card companies notify their consumers through email, so if you are diligent in opening the notices, you will be aware of whatever changes are going to occur.
Credit card cashback programs can be beneficial, provided you are using your credit responsibly. It is too easy to fall into a trap of spending more in the name of earning rewards.