Is a Credit Card the Right Choice for You?

It is very common to hear financial experts telling people to stay away from credit cards at all costs – they are evil, steer clear!  Yes, it is true that if abused or used improperly, credit cards can be a dangerous temptation and, in many cases, can lead to a never-ending cycle of minimum payments, skyrocketing principal balances, and, ultimately, total financial destruction.  For many people, managing credit card debt can be an unrecoverable tailspin.

Despite the doom and gloom, credit cards are also very valuable tools, and can even help build wealth.  To encourage people to use their cards, most financial institutions offer a reward program when purchases are made. The difference between someone who will reap the benefits of using a credit card wisely and someone who will drift into an unhealthy amount of debt is how you manage your money and your accounts. While it is not wise to use credit cards to purchase items you cannot afford, using a credit card can give you rewards that a debit card cannot.

A rewards credit card is what it sounds like – a credit card that rewards you when you make purchases with it. 

Here are some common rewards offered:

• Cash Back
  These types of reward cards are straightforward – when using a cash back credit card, for each purchase that is made, a percentage is accumulated in cash that you can use for various purposes.  For example, let’s say the card offers 4% back on purchases.  When using the card to purchase a $100 item, the user will earn $4 in rewards.  These types of cards are good for people who plan to just use one card when purchasing items.

• Points and Miles
  Points and miles-based reward cards work in the same fashion.  Instead of earning cash, you earn either points or miles that can be exchanged for items or travel.  Just like with cash-back cards, you usually earn points or miles based on a set rate.  For example, it could be you earn a point for every dollar you spend.  Understanding exactly how much you are being rewarded can be a little more complicated compared to cash-back cards so you may need to get out the calculator to determine the true dollar amount of your reward.

Rewards credit cards can be tempting, but they are only worth it if you can use those rewards to your advantage.

➕ Maximizing your credit card rewards

While it will take some planning and managing your money properly, you can further optimize your rewards by using some of the following strategies:

Use a combination of rewards cards

It's a common strategy for credit card companies to offer a greater percentage back when you spend in a specific category such as travel or fuel. Sometimes these rewards change by the month or by the quarter. Maximize how much you can earn by knowing these categories and using each card wisely.

Take advantage of sign-up bonuses

Some rewards cards offer special bonuses if you spend a certain amount of money within a specific time frame. These bonuses can be worth hundreds of dollars but only spend what you can afford to pay back. Don't chase sign-up bonuses in an attempt to earn rewards if paying off the debt is not in the cards.

Understand how much you are getting rewarded

Some rewards cards offer gift cards, travel purchases, or online shopping credits. This is where you need to take some time to do the math to see which reward is best, or worth it in the long run.

⚖️ Pros and cons of using rewards cards

While it is always nice to earn money, there are some things to consider before signing up for a rewards card.

Pros

• Earn a reward (cash-back, miles, etc.) on every purchase you make

• Can redeem rewards and save money on things such as travel and online shopping

• Many do not charge an annual fee

Cons

• If you are not disciplined, you could spend more than you should in hopes of getting more rewards

• You have to be aware of redemption schedules to make sure you don’t miss out

• Some charge an annual fee and/or require you to have excellent credit

🛡️ A layer of protection

Finally, credit cards offer greater protection to consumers in cases of unauthorized use when your card is lost or if your credit card stolen.

If you plan to get a credit card and are disciplined enough to make sure you have the money to pay off the balance every month, it is a good idea to apply for one that offers some type of reward. Choosing a card that doesn’t offer rewards is like finding money in the pocket of jeans you wore months ago and just leaving it there.  Credit cards can be a tremendously valuable tool to use for day-to-day purchases if you are disciplined enough to save the cash that you would have spent on those items and pay off your balance in full every month. This can be a slippery slope, so proceed with caution!