3 rewards card mistakes that lose you money
By Emma Lunn
Rewards credit cards are seeing a surge in popularity -- in fact, American Express recently tracked a 32% uplift in reward card ownership this past year.
And why not? Travel reward and cash-back
cards sound like a great idea: You get paid for spending on the card, something
you'd be doing anyway.
Yet if you don't use your rewards card responsibly, you could end up diluting your rewards earnings -- or even losing money. Here are three mistakes not to make with your rewards card.
1: Not repaying the card balance in full each month
Take a close look at your credit card's rewards scheme. For each pound you spend, you'll earn a few pence at most in rewards. Now look at your interest rate. It should become clear that a single month of not paying off your balance could wipe out that month's rewards earnings.
Of course, it's a good idea to pay off your balance on any credit card. Yet rewards cards tend to have even higher interest rates than the less perk-heavy cards on the market, making them an even more expensive way to borrow. If you have a habit of carrying a balance and are still tempted to get a rewards card, consider these numbers:
The Santander Debenhams MasterCard charges no interest the first three months, but then charges an annual percentage rate (APR) of 19.9%. Cardholders earn one point for each £1 spent in Debenhams, and one point for every £2 spent elsewhere. Five hundred points equals a £5 voucher, which is issued quarterly.
So if you spend the £500 at Debenhams necessary to earn the £5 voucher, but carry that balance beyond the first three months, the £8 in interest that fourth month will more than cancel out the reward -- and raise your balance.
Instead, consider a card that has a
longer interest-free period (the Tesco Bank Clubcard, for example, is offering
16 months interest-free) and a lower APR. You may not get any rewards -- but
you'll avoid the expensive penalties of carrying a balance.
Mistake 2: Overspending
If you get a rewards card that offers perks for shopping at a particular store, beware.
"Store reward cards are, in my opinion a complete no-go area," says Jay Lewis of personal finance blog SterlingEffort.com.
Store rewards cards often offer vouchers, discounts for signing up and even holiday shopping discounts. Yet modest discounts could lure you into making an extra shopping trip, feeding your balance and then making Mistake No. 1.
"Whilst you may think that you can pay [the full balance] off at the end of the month, these cards actively force you to spend more on items you probably wouldn't have bought before, all under the blanket of getting a good deal," Lewis says. "In the long run, you could end up much worse off -- that 10% off won't stretch as far as you think."
3: Not spending enough
Rewards cards can be high-maintenance. In addition to avoiding overspending, you have to be sure to spend enough in the right places to accelerate your rewards earnings.
Some people, however, take out reward cards with the intention of using them for all spending that would earn them points or cash -- but then end up using other forms of payment for everyday spending.
American Express research found that while reward card ownership has increased since 2011 levels, more than half (52%) of UK adults are still missing out on £3 billion in potential rewards each year by using other payment methods like debit cards, non-rewards credit cards and cash.
It's a tricky balancing act. On one hand, you want to spend enough to redeem the rewards your card promises. On the other, you don't want to rack up a huge balance you can't pay off in full every month. Learn your card's rewards scheme inside out so that you know exactly which purchases will earn you the most rewards -- and save the rest of your purchases for your lower-interest credit cards and debit cards.
Published: 25 September 2012
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