Are Credit Card Rewards Worth the Risk of Revolving Credit?
Is it worth signing up for a new credit card just for the rewards? Expert opinions are divided, but one thing is certain: If you’re going to add another account to your credit profile, you have to use it responsibly. That means always paying the balance in full every single month to avoid interest charges and late fees, not opening and closing cards repeatedly, and never overspending.
For those who can stick to only using their rewards cards on items they would have purchased anyway, and who can responsibly pay off the entire balance — not just the minimum payment amount — every month, there are some great rewards to be had. Here are the top three credit card reward types you might want to consider looking into:
Travel rewards are, without question, among the most popular and attractive programs. For those who are dedicated to the craft of collecting and cashing in points, being able to travel the world for nothing more than the taxes or fees can save them thousands of dollars — even hundreds of thousands — over time.
Analysts at NerdWallet did a comprehensive comparison of all the travel rewards cards on the market this year, and they came up with a few recommendations for a variety of categories, including those that earn airline and hotel miles. It is important to note that each of their top picks requires good or excellent credit scores; anyone in the sub-690 range probably isn’t going to qualify for one of the top-tier travel reward cards.
2. Cash Back
Cash back rewards can be tricky. For higher-end cards that offer cash back on all purchases, your credit rating has to be fairly high to qualify. And those cards that offer cash back on specific categories or “rotating” categories — think groceries one month and gas the next — you will need a good-to-great credit score to qualify.
But for those who do qualify for these rewards, it really is like getting free money back. Most of them average a 1% to 2% return on qualifying purchases. That might not seem like much, but for those who can manage their credit responsibly, paying all your bills on the rewards card (and paying off the balance each month) can add up fast.
While this could be considered a subset of travel rewards, points can come in a variety of forms. It might be airline or hotel points, but in many cases, points cards offer a “catalog” with a variety of choices. You might find the opportunity to get the brand-new iPhone on points alone, for example, more attractive than banking points for travel. If you want your next vacation to be a cruise, a points credit card will have a wider range of options than a dedicated airline or hotel card.
The takeaway, however, always comes back to responsible use. Reward points will begin to look less attractive as your outstanding card balance grows. The best advice for those who want to get into the rewards game is to choose one or two cards with benefits you feel strongly about and resist the urge to use the card for extravagant purchases. That’s the best and only way to reap the rewards while minimizing the risks of revolving credit.