Have you recently received a promotional mailing for one of those credit cards offering valuable rewards? Whether you’re just diving into the world of credit cards for the first time or you are considering adding one to your collection, this type of card can be very tempting. According to a LendingTree survey, 87% of credit card holders have at least one card that they use to earn rewards.
You can almost see yourself on the beach in Florida or as a passenger in a vintage World War II fighter plane – thanks to the points you could accumulate. Or maybe you’re thinking about that new laptop computer you really need, which you could buy as soon as you earn enough cash back.
But wait, don’t give into temptation just yet.
Maybe you should just say no
There are two main problems with rewards credit cards. Firstly, they can easily get you into debt. The credit card issuers don’t offer rewards out of the goodness of their hearts.
The primary purpose of these cards is to incentivize you to spend more than perhaps you should while chasing their rewards.
But when you do the math, you will see that the rewards are not necessarily a great deal. For example, let’s say a specific card is currently offering 5X cash back when you use it at certain merchants, including Amazon. Wow, that sounds neat! You could do most of your Christmas shopping through Amazon in exchange for a lot of cashback.
Not so much
While 5X cashback might sound like a lot it’s only five points (cents) on every $100 you spend. So, to earn $100 in cash back or rewards points you’d have to spend $2,000 with the right merchants.
If you are earning only 2X cash back, the numbers become even less enticing as you would have to spend $5,000 to earn that $100!
The second problem
If you pay off the balance on your rewards credit card every month, you don’t have to worry about a second problem.
However, if you carry forward a balance, the interest rate you will be charged could make rewards cards a bad choice. According to Forbes Advisor’s most recent credit card rates report, the average interest rate is 24.54%.
Now, let’s do the math again. Even with 5X cash back, you might be earning 5% but if you carry a balance forward, you may be paying 24% in interest. This will more than offset the 5% you earned using the card.
Why a plain vanilla credit card?
There are several reasons why you might forgo the rewards card and take out a plain-vanilla credit card. For one thing, these cards come with a number of extras that make them of great value.
Think about the credit card fees. As an example, the Citi Simplicity Card has no annual fee, no late fee (ever), no penalty fee, and offers 0% APR for 12 months on purchases and a 0% APR for 21 months on balance transfers.
This makes it a good choice if you require a long time to pay off your initial purchases or tend to make the occasional late payment.
Other credit cards may give you a higher credit line if you make your first few monthly payments on time. In addition, some cards also offer fraud coverage in case it is lost or stolen. In addition, online banking enables you to access your account even from your smartphone.
Better interest rates
Plain vanilla or no-frills credit cards generally have better interest rates than rewards cards. As mentioned above, the Citi Simplicity Card offers a 0% APR for your first 21 months. After that, the card has an APR of 18.99% – 29.74%.
They can be easier to understand
If you have ever tried to work your way through the details of a credit card rewards program, you know how exhausting it can be. You may have to go to three or more different pages just to get all the information you need.
And it’s likely you will find a lot of disclosure statements written in the fine print by the card issuer’s lawyers that are designed for just one thing – to protect the credit card company from any possible legal action.
Remember that ignoring the fine print can result in your unknowingly signing away some of your rights. On the other hand, the details of a plain-vanilla credit card are generally easier to understand. But be forewarned that they, too, carry their share of disclosure statements.
When you choose a vanilla card, you will be giving up the chance to earn rewards. But you will likely have a lower interest rate, enjoy the freedom of missing a payment without incurring a penalty, and still receive some nice “freebies” such as travel insurance and payment protection.
Before you jump on that promotional offer for a rewards card, it’s important to look at the big picture. Sit down, think it through, and calculate the cash back you would be earning versus the interest you might pay. You may decide your best bet would be one of the plain-vanilla credit cards.