Most people think of reward cards as a good thing, but in today’s guest post Michael from CreditCardForum will be discussing why they’re not right for everyone. Besides writing credit card reviews on his forum and blog, Michael also has a lot of personal experiences to share about his use of cash back credit cards and why they can lead to problems.
Twenty to thirty years ago, cash back credit cards were for the most part non-existent. But nowadays, it seems that just about every card out there is offering cash rebates, miles, points, or some other gimmick. Many assume this to be a “good thing” but that’s not always the case…
Why reward credit cards might lead to problems
Have you ever been at a store and saw something you kind of like (and don’t really need) but since it was on sale, you bought it anyways? Of course you have! Almost everyone falls for this marketing trick at least once in a while. Studies show that when something is on sale or discounted, the consumer is more likely to buy.
To a lesser degree, without a doubt there are some people that take up this “on sale” mentality when using cash back credit cards. If their card is giving a 5% rebate on gas, groceries, drugstores, or whatever category it may be, they may be inclined to spend more. I consider myself extremely disciplined when it comes to finances, but even I am guilty of doing this once in a while.
For example, I was at Staples a few weeks ago and I knew I could have gotten the paper cheaper at Target, but I said to myself “Well my AT&T Universal credit card gives 3% at office supply stores, so I’ll get it here.” Thinking like that is actually quite ridiculous – the computer paper would have been about 15% cheaper at Target, which definitely trumps the pitiful 3% rebate from my credit card!
The bottom line is reward cards encourage many people to spend more than they normally would. Or, as in my case, they can lead to people shopping at more expensive stores (i.e. buying supplies at a drugstore because of the higher rewards there, when in reality a place like Target, Wal-Mart, etc. would be significantly cheaper for those items).
If you reward credit cards cause you to do these same things, it may be best to avoid using those cards altogether. Remember, saving 5% does not make sense if it’s causing you to spend 20% more!
When are they okay to use?
If you’re extremely disciplined with reward cards, they can be a useful financial tool. For example back a few years ago when I was dirt poor, I had no choice but to be disciplined with every penny spent. I definitely fell under the income bracket that would be classified as poverty, so for me it was all about coupons and discounts when buying necessities. I would use my credit card for the 5% rebates on groceries and gas, but that would never encourage me to buy or spend anything extra, because my money was so tight I simply didn’t have that luxury even if I wanted to do so. In that situation it totally made sense, but not everyone would have handled it the same. If the rewards would have encouraged me to spend more, the outcome could have been disastrous.
Have reward cards ever influenced your spending?
Banks around the world are beginning to get the message. HSBC Australia can set up a low credit limit and an automatic notification if you hit the limit. Get the limit low enough and it becomes an early warning signal.