The following is a guest post from Mike who runs CreditCardForum.com. He started it nearly 4 years ago as forum for rating credit card deals, where consumers can openly post their compliments and complaints about a given credit card.
When it comes to credit cards, chances are you either hate them or love them. For those in the latter category, the argument is made that the earned rewards are the equivalent of saving money (and therefore, credit cards are a good thing). In theory that is correct, but you have to factor in the psychology, too.
Sometimes the psychology of earning rewards leads us to spend more. For some it’s quite easy to identify this problem but for others, it’s not always so obvious. Based on actual discussions by members on my site CreditCardForum, below are 3 scenarios you should test yourself with.
Test #1: Do Reward Categories Influence Where You Shop?
It goes without saying... there are a plethora of credit cards that give store specific rebates. For example, the Target store card will earn a 5% rebate at Target. Then of course there are many cards which don’t discriminate by store, but rather a category of stores. For example, the Chase Freedom gives 5% at all drugstores for 3 months out of the year.
Do cards such as these influence where you shop? If so, you probably fail this test. Because the one and only criteria you should go by is who sells a particular item the cheapest. If you restrict yourself to buying a particular item at say, Target, just because you have their rewards card, then you may be missing out on cheaper prices elsewhere (like the set of dishes I bought on Amazon last week for $20 which cost $40 at Target).
Test #2: Do Holiday Bonus Rewards Sway Your Spending?
Every year during the 4th quarter, credit card companies mail out promotions to their existing cardholders, to try and convince them to use their card for Christmas shopping. For example, in October I was sent an offer for my Amazon credit card – spend $2,600+ by December 31st and receive 5,000 bonus points.
The banks customize these offers based on your spending. If I was already expected to spend that much, Chase would have never sent me that offer. However since I only put a couple hundred per month on my Amazon card, this promotion requires me to spend around 4 to 5x my normal amount.
If I just shift spending from another card onto my Amazon card to meet the threshold, this isn’t a problem. However be careful, because I have seen people on my forum say things like “I need to find more stuff to buy before December 31st” so they can meet the spending requirements for their bonus. If you have to do that, you’re just falling for the bait.
Test #3: Are You Paying for Unused Rewards and Benefits?
One of the biggest problems I see now is that people apply for credit cards they simply do not need. Truth be told, unless you are an avid traveler or big spender, there’s probably no point in paying an annual fee for a premium credit card.
For example, there was a member on my forum who said he really wants an American Express Premier Rewards Gold Card, yet he spends less than $1,000 a month and doesn’t travel. That card gives 1 point per dollar on regular spending, 2x on gas and groceries, an 3x on airfare.
Even if half of his annual spending was on the higher reward categories, when you do the math you will see the value of his total annual rewards will probably be only $200 to $250. Subtract the $175 annual fee from that and he has probably only made $25 to $75. Definitely not worth it, when you consider that using a free 1% cash back credit card on $12k in spending would have netted him $120.
The lesson here is to run the numbers before applying for a fee-based card. Don’t get drawn in by the allure of higher rewards and benefits if at the end of the day, you aren’t using them enough to make it worthwhile.
The Solution: Avoiding Reward Categories Altogether?
If they cause problems, you may be better off avoiding category-specific rewards altogether. Instead it might make more sense to just use one card that gives a higher rebate on everything regardless of category (that way you won’t be tempted to spend more at certain places). For example, Capital One gives a straight 2% on their Venture or 1.25% on their Cash Rewards credit card. However the best out there are probably the Fidelity credit cards because they give an unlimited 2% on everything with no annual fee. The only catch is you need a Fidelity account to get one.
Last but not least… if you ever carry a balance then you shouldn’t even pay attention to credit card rewards. Instead, you need to focus on paying off that debt as quickly as possible and shaking your bad financial habits. Because why care about 1 or 2% cash back when you are paying 10 or 20% interest?
Photo By: Images of Money