Credit cards offer plenty of benefits, but come with their own set of risks. The benefits, such as cash back, rewards points, and airline miles, are often advertised clearly, as without them, there would be little incentive to use credit cards in the first place. The risks, however, often require a bit more reading and a bit more of a technical understanding of interest, penalties, and banking procedures.
Credit card companies offer an array of benefits. Many cash back credit cards offer 1% to 1.5% back on all purchases, but if you have specific habits, certain credit cards could offer more bang for your buck. Discover offers rotating categories, where you can earn 5% cash back through specific categories every few months, such as grocery stores, gas stations, and restaurants. Other companies, such as American Express, offer cards with up to 6% cash back year round at grocery stores.
Instead of cash back, some companies offer rewards points that can be exchanged for cash back, gift cards, airline miles and more. Both Chase and American Express have their own rewards programs that offer benefits through their partners. If you travel often, many of these programs offer VIP lounge access, airline fee reimbursements, and discounts through their partners. If done properly, it can be possible to use rewards points to earn a 10% to 20% discount on flights. These programs offer plenty of luxury, but many also come with an annual fee, so be sure to verify that the rewards earned from the program greatly outweigh the costs.
Don’t get caught up in the rewards game unless you already have a handle on your average spending. Credit cards can allow you to remove yourself from the cost associated with a transaction, making you feel like you didn’t spend any money because it hasn’t left your account yet. The easiest way to save money on a purchase is to simply not make the purchase. If your credit card gives you 1% cash back on every purchase, it would take you $1,000 worth of spending to receive $10 reward. While this technically does offer a return on your money, you will generally lose that amount and then some if you carry a balance or make a late payment. If your credit card has an interest rate of 20% APR and you wait one month to pay off the $1,000 purchase, you will have paid over $16 in interest, completely negating any cash back you may have received. Not to mention if you miss a payment and are charged a fee of over $25. If you consider yourself a procrastinator, it may be best to avoid credit cards altogether, as it can generally take 1-2 days for a credit card payment to be received from your bank, which runs the risk of incurring a late fee.
Unless you pay your credit card balance in full every month, credit cards are usually more hassle than they’re worth. Even if you are paying in full every month, be sure to verify that the rewards you get outweigh the risks of late payments, interest, and membership fees charged to your account. For most people, re-evaluating expenses and creating a budget will save much more than the rewards earned by participating in cash back and rewards programs.