I talk all of the time about debt and not having credit cards. It seems when I make this statement, the immediate response I get back is “But why not use them to get the rewards?” I personally don’t understand where that makes owning a credit card a good thing – rewards or not. However, I wanted to give it a good shake and see if I was overlooking something, so I took a look to see what I could learn.
The first card that I checked out was Capital One Rewards — mainly because those commercials are pretty clever! I looked around it it seems that for most of the “Best” rewards you need to have excellent credit (but this is not defined as to what they are looking for). Regardless of that, they do offer cards which offer frequent flier miles or even actual cash back. If you do not have excellent credit, you will have to pay an annual fee of $39 for their card. There is no clarification as to what they define excellent credit on their site, so I can’t even tell you what they will look at. That honestly makes me wonder if anyone really gets the card without a fee (they probably do; I just see nothing disclosing the parameters).
The second thing I noticed is that they offer 0% APR for one full year. If you transfer your balance, you will pay anywhere from 12.9% – 20.9% (depending upon the card and the length of time that lapses between the time you transfer and one year). That rate can get pretty steep and end up costing someone a lot more than they intended.
As I looked more closely, I wanted to determine what type of reward one might receive from this card. The card pays 1% cash back PLUS a 50% annual bonus on your cash back. Let’s just say that you charge $500 a month on your card. You are diligent in paying the card off every single month so that you accrue no interest. In one year, at 1% cash back, you would earn $60 plus a bonus of $30 for a total of $90 (if you have an excellent rating you would also receive a $100 bonus). Out of this $90, you might have to pay the annual fee of $39 – which makes a net earned for the year $51 (or just $4.25 a month).
Now, if you happen to not pay off the card each month, you would begin accruing interest — at the rate listed above. Sadly, this is what more and more people do. They will then have used up their entire cash back to cover interest PLUS pay even more to the credit card company — all just to get a “reward.” They get nothing. All they get is deeper into debt.
I also took a look at Discover. They offer 5% cash back…….just on select categories. These can change during the year. Now, it was unclear on the site if they notify you if these change or not. If you don’t purchase within these categories, you earn nothing until you spend $3,000 annually – at which time you start to earn 1% (which 1% of $3,000 is only $30). You can also earn .25% on any warehouse purchases up to $3,000. One thing that is very important to note is that the purchases made at warehouses, or through the 5% categories, will NOT count towards your $3,000 purchase to earn 1% cash back. Are you as horribly confused as me?
So, now, onto the GOOD thing about rewards. If you are amongst the minimal percentage of Americans who actually pay down their credit bills every single month (carrying a zero balance and never paying interest), then I can honestly see where you might like to continue using them. They really could end up being a true reward for you. If you do pay it off and make it worth that is great.
The BAD thing is that it seems that the offers can be confusing and misleading. When you see Discover pays 5% cash back, you sign up thinking you will earn 5% on your purchases – when you may or may not. It is also so sad as many just do not pay down the balances in full each month. At 12, 15 or even 20% interest, this continues to push them further and further into debt. They feel like they are drowning (and I would know as I have been in this situation myself).
I just don’t think that a simple reward that you may or may not receive is enough reason to sign on the dotted line. It seems that credit cards were created to bring instant satisfaction to some. So many have forgotten about the “work hard and earn it philosophy”. We constantly have images of things that “we can’t live without” flashing in front of us online or on television. It makes people feel they are missing out and they need to spend. It drives me crazy!
Why do I nor like them? They cause families to live beyond their means. They make people think they have the money they don’t. The rewards taunt people in and just don’t always work as the commercials and ads claim that they do. Yes, I realize that this holds true to many things in life. I just think that earning an extra $5 a month is not enough reward for me to sign on the dotted line. I live by the mantra that if I can’t pay for it in cash then I just don’t need it. And the funny thing is, since I’ve stopped using credit cards and spending, I am happier with less. Go figure!!