The overall value of rewards credit cards depends on your spending habits, your ability to pay off the balance quickly, and the kind of rewards you want to get. If you can balance these different variables, a rewards credit card could be right for you.
Here is what you need to know to get the most out of a rewards card.
You will have to use your card often
In order to earn significant rewards, you will have to use your card regularly. The equation for most basic rewards cards is one point or one mile per dollar spent. A flight or a package vacation will usually cost thousands of points. If you only use your card occasionally at a restaurant or coffee shop, for example, it could be years before you earn enough reward points for a free trip.
However, if you can use your card for a lot of different purchases and expenses, the points could add up quickly. Maybe you could get into the habit of using your card to buy gas for your car or to pay monthly bills for your home. Using your card consistently for these regular expenses can lead to a significant amount of points by the end of the year.
If you do this, however, there is one rule that you MUST follow….
Interest can cancel out points
Cardholders must pay interest on the money that they borrow from a credit card company. However, the interest payments can be avoided by paying off the entire balance before the end of each billing cycle.
If you use your credit card to make $500 in purchases each month, you must have money in the bank to pay off that $500 at the end of the month. If you do not carry the balance over to the next month, you will not be hit with interest charges.
Here is a simplistic example of why this is important for rewards cards. Imagine you earn $5 worth of rewards in April, but you have to pay $5 in interest because you did not pay off your March balance. The interest cancels out the value of the rewards points, so it is not worth the effort to collect the points in the first place.
Use other options if you need money quickly
The temptation to use your credit card for unforeseen expenses will always be there. An online personal loan, which can give you cash to cover unexpected costs, is a way to avoid having to use your credit card in situations where you cannot pay off the balance quickly.
So, if you can use a rewards credit card frequently and pay off the entire balance quickly, then it will be worthwhile for you.