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Have you recently received a promotional mailing for one of those credit cards that offer great rewards? Whether you’re just diving into the world of credit cards for the first time or are thinking about adding another card, a rewards card can be very tempting. According to a study published on Credio.com, almost half of their respondents said they are attracted to a credit card because of the benefits and 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’ll accumulate. Or maybe you’re thinking about that new laptop computer you could buy with the cash back you earn.
Maybe you should just say no
There are two problems with rewards credit cards. First, they’re designed to get you into debt. The credit card issuers don’t offer rewards out of the goodness of their hearts. The whole purpose of these cards is to incentivize you to spend more and more – chasing their rewards. But when you do the math you’ll see that those rewards are not such a great deal. Here’s an example. The Chase Freedom card is currently offering 5X cash back when you use it at certain merchants, including Amazon. Wow, that sounds pretty great! You just do most of your Christmas shopping through Amazon and you’ll earn a lot of cash back.
Not so much
While 5X cash back might sound like a lot it’s really only five points (cents) on every $100 you spend. So to earn $100 in cash back or rewards points you’d have to spend $2000 with the right merchants. If you’re earning only 2X cash back the numbers get even worse as you would have to spend $5000 to earn that $100!
The second problem
If you pay off the balance on your rewards credit card every month there is no second problem. However, if you carry forward a balance then there is one – the interest rate you’ll be charged. Many of the rewards cards will show you their interest rates as something like 12.99% to 22.99% variable. But don’t be fooled. You would need to have a very high credit score to get that 12.99%. What’s more likely is that you’ll end up paying around 15% or 16%.
Now, do the math again. Even with 5X cash back you may be earning 5% but if you carry a balance forward you may be paying 15% in interest, which 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 get a plain-vanilla credit card. For one thing, these cards come with a number of extras that can make them a great value. Think about the credit card fees. As an example of this, the Citi Simplicity Card has no annual fee, no late fee (ever), no penalty fee and offers 0% interest on purchases for the first 21 months. This makes it a good choice if you need a long time to pay off your initial purchases or tend to make the occasional late payment.
The Capital One Platinum Credit Card could also be a good choice as it will give you a higher credit line if you make your first five monthly payments on time. In addition, it offers fraud coverage if the card is lost or stolen as well as online banking, which would allow you to access your account even from your smartphone. You can also make your payments on this card online, by check or at a local branch with no fee and you can actually pick the monthly due date that best fits your situation.
With the plain vanilla Chase Slate Credit Card you get your FICO credit score (free) and a Credit Dashboard that will show you the reasons behind your score, a summary of your credit report information and information that could help you better manage your credit. Plus it offers a 0% introductory APR for your first 15 months and there’s no annual fee.
Better interest rates
The plain vanilla or no-frills credit cards generally have better interest rates than rewards cards. As you just read the Citi Simplicity Card has 0% interest rate for your first 21 months. And the Simmons Bank First Visa Platinum credit card has a 7.25% APR. Yes, you read that right – 7.25% This card comes with travel accident insurance with a coverage of $1,000,000, a car rental loss/damage waiver and emergency cash and credit card replacement. The afore mentioned Citi Simplicity Card has three interest rates: 12.99%, 17.99% or 21.99%. Of course, the interest rate you’ll be assigned will depend on your credit worthiness. This means if you have excellent credit you should be able to qualify for the 12.99%. On the other hand, if your credit is less than stellar the APR can get high in a hurry.
They can be easier to understand
If you’ve ever tried to work your way through the details of a credit card’s rewards program you know what a chore this 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’ll find a lot of disclosure statements written in fine print by the card issuer’s lawyers that are designed for just one thing – to protect the credit card company. According to CNBC.com, not reading the fine print can make you sign away some of your rights – unknowingly. On the other hand, the details of a plain-vanilla credit card are generally easier to understand although they, too, have their share of disclosure statements.
In summary
More and more people are choosing plain vanilla credit cards over rewards cards and you’ve just read some of the reasons why. When you choose one of these cards you’ll be giving up any rewards but you should have a lower interest rate, could miss a payment without incurring a penalty and still get some nice “freebies” such as your FICO score, travel insurance and payment protection. So, before you jump on that promotional offer for a rewards card, sit down and think it through, calculate the cash back you would be earning versus the interest you’ll be paying, and you may decide your best bet would be one of the plain-vanilla credit cards.
