3 Costly Mistakes People Make With Rewards Credit Cards

Rewards credit cards are popular, and for good reason. With a rewards card, you can turn your everyday spending into cash back or travel rewards. More than half of all consumers have at least one, according to credit card research by The Motley Fool Ascent.

Used correctly, rewards cards help you save money. But not everyone uses these cards correctly. There are a few costly mistakes that people often make with this type of credit card.

1. Carrying a balance

The only way to come out ahead with a rewards card is paying the balance in full every month. If you carry a balance, you’ll be charged interest. Credit card rewards will never outweigh the cost of interest charges.

To confirm this, compare your card’s rewards rate to its APR. With the best credit cards, you may earn 2% back on purchases. Or, you could get a base rate of 1% to 1.5%, with a higher rate of 3% to 6% in bonus categories.

The average interest rate on credit cards is 21.47%, according to the Federal Reserve. And rewards cards often have above-average interest rates to make up for those generous rewards programs. So when you carry a balance, you’re paying 20% or more per year to earn about 2%. That’s a losing proposition.

If you have credit card debt, focus on paying it off. You may want to look at balance transfer credit cards. These let you refinance your debt at a 0% intro APR. Wait until you’re out of debt to worry about credit card rewards.

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2. Using rewards as an excuse to spend more money

One of the dangers of rewards is that they incentivize spending money. That can cause you to make purchases you normally wouldn’t.

For example, you see a $400 jacket that you like. You don’t need it, and if you spend that much, you won’t reach your savings goals for the month. To justify it, you tell yourself that your rewards card earns 3% at this store. That’s great, but it’s only $12 in rewards, so you’re still down $388.

Here’s another important rule to come out ahead with rewards cards: Stick to your usual spending habits. Use your rewards card to pay your regular bills. Don’t start spending more because of the rewards you’ll earn.

3. Choosing low-value redemptions

Once you’ve earned rewards, you need to redeem them. Many rewards cards give you a variety of redemption options. This is especially true with travel credit cards, which are known for offering lots of ways to redeem points. It can also be the case with cash back cards, though. Some of them let you redeem your cash back for gift cards or products in the card issuer’s shopping portal.

Check the value of your rewards with each redemption option before you use them. The value isn’t always the same across the board. For example, some travel cards let you redeem rewards for $0.01 per point or more toward travel purchases. If you use them for cash back, you may only get half that. On 100,000 points, that’s a difference of $500 in value.

Your rewards cards shouldn’t cost you money, so make sure you’re not paying interest or spending more than usual to earn rewards. While you can use your rewards however you’d like, it’s a good idea to pick a redemption option that gives you the most value for them.

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