Today we are going to discuss credit card rewards! These types of credit cards are ones that clients get really excited about. I wanted to examine the good and the bad and when to use credit cards with rewards. We will also examine when you should opt-out of rewards cards to avoid spending more money than you’re earning in points.
The Good and the Bad
I’m going to focus more specifically on travel rewards credit cards because that’s where I have the most experience, but this can apply to any general type of rewards card.
The good thing is you have the opportunity to earn “free” stuff. If you spend a certain amount of money in the first three months that you open the card, you can earn bonus miles, turning into a free trip. Or, if you spend a certain amount of money every month on groceries, dining, shopping, etc., you earn corresponding points for rewards. However, the downside, and why credit card points are such a huge moneymaker for credit card companies, is because people often spend more money to earn more points; and they don’t have a clear sense of how much the points are worth compared to the extra money that they’re spending.
So, a little background on my history with credit cards. Back in 2016, I opened up about six credit cards that year alone, and I ultimately earned 235,000 miles. I took about six trips, including attending a cousin’s wedding, visiting California and Brazil. I took so many trips I can’t even remember them all. So, for me, the cards were useful and allowed me to travel and do incredible things.
Rule of Thumb
I know many of you are interested in having more freedom and flexibility, often leveraging that to travel. So rewards cards could be a great option. However, it’s essential to get a couple of basic steps down first before jumping into credit card rewards.
If you cannot pay off your credit cards in full every month, don’t open a rewards card.
The most important thing you want to do is pay off your credit card in full so that you aren’t paying interest. Even if you’re getting rewards, the amount of interest paid makes it worthless. Focus all your attention on paying down credit card debt and reducing the amount of money you put on the credit card.
Once you’ve finished paying off credit card debt, opt for a card that doesn’t have an annual fee.
There are a good amount of cards that have travel rewards that also require an annual fee. So, I would avoid those and opt for a free credit card. Even some credit cards without fees have basic points to earn, such as a point-to-dollar conversion. This type of card would allow you to earn points but not be so points-driven. And that can help prevent overspending, which may happen with more aggressive rewards programs.
If you can pay off your credit cards in full every month and you want to start opening some rewards cards, know that opening a lot of credit cards in a short amount of time, as I did, will impact your credit score. By opening those six cards in a year, my score dropped by about 25 points. In an earlier Fireside Financials video, I talked about the five factors that impact your credit score, so if you’re interested, go back and watch that video to figure out why the scores tend to decrease and increase.
So, what are the takeaways? Open travel or rewards cards conservatively or cautiously in the beginning. If you have a lot of debt on credit cards, prioritize reducing that debt over getting more points.
Another thing you can do is try other resources to achieve your goals. I created a text called the Travel Winning Guide. You may have heard of travel hacking; I feel like hacking sounds nefarious, so I wanted to call it travel winnings. This guide walks you through how to open and use a credit card with rewards points to get your first free flight. Again, this is for those of you who can pay off your credit cards in full every month and feel confident that you won’t go into that cycle of overspending to get rewards. But it’s something that I created a while ago that has helped clients and friends.
And as always, if you have any questions or comments, put them in the comments below. I look forward to hearing from you!
This post was adapted from an episode of the Fireside Financials series. If you’d like to check out the video, you can watch it here!