Are credit card rewards really worth it? Nope. Those credit card points you’ve been racking up always come at a price—and that price is the money in your wallet . . . and maybe your dignity.
Listen: Credit card companies are pretty stinking smart. They are master marketers. Last year, the industry was valued at over $100 billion.1 So . . . how do they make all that money? Well, from those hard-working, interest-paying, credit-card-carrying members around the globe.
They reel you in with sign-up bonuses, credit card rewards, cash-back incentives, restaurant discounts and airline miles. Bottom line? They use the word “free” to their advantage (who doesn’t love free things?). But we’re here to expose the credit card industry’s biggest secret: All those free rewards are not actually free.
How Do Credit Card Rewards Work?
A recent study by Ramsey Solutions found that 54% of Americans have a credit card because they want to earn credit card rewards or cash back on their purchases. But here’s the thing: Most people don’t know the gut-punching truth behind how credit card rewards work. (For example, did you know credit card holders—like you—are actually the ones funding those rewards in interest payments and fees? Yikes.) So let’s take a closer look.
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The credit card rewards system goes a little something like this: The more money you spend, the more points you rack up toward whatever prize you have your eyes on. Most credit card rewards systems earn you points, travel miles or cash back. And once you hit a certain amount of points, you can trade those puppies in for some kind of reward.
But those points and prizes are all determined by the boss in the corner office at Visa or Mastercard. That means that just when you’ve finally saved up enough points to fly your family to Hawaii . . . the point system could change. Just like that. So, after they’ve duped you into giving them your information and you’ve overspent on everyday purchases (plus paid interest), they don’t even deliver on their promise to reward you. Ouch. But that’s just a tip of the iceberg.
Types of Credit Card Rewards
Credit card companies get you to spend way more than you ever would in cold hard cash, and then they reward you with a teeny tiny percentage of the money you’ve padded their pockets with. That teeny tiny percentage is called a credit card reward, and it most often comes in the form of points, cash back and travel miles.
Let’s break down each one.
Credit Card Points
Credit card points are a type of credit card reward you “earn” anytime you swipe your card to buy something. And depending on the terms of your credit card, you earn up to a certain number of points per transaction. Once you’ve earned enough points to cash in, you can choose from a list of things like gift cards, discounts at restaurants, travel and more (depending on your credit card issuer).
Each time you swipe your card, you can earn about one point per dollar spent. But, when it comes time to redeem your points, you’ll find that one point equals roughly one penny. That’s where it hurts. You have to spend a lot just to get a little back. And like we said earlier, the real kicker is that your point value can change on a whim. All that spending for nothing.
Let’s face it . . . no one ever got rich off of credit card points.
Cash back means actual money deposited in your bank account, right? Not necessarily. With this reward, you can request a mailed check, but you can also put the money toward your card balance (if you have a balance).
Here’s how cash back works: When you spend with your credit card, you can get a percentage of cash back on your purchases. How much? It all depends on your card issuer, but many offer anywhere from 1–2%. So, if you owe $1,400 on your credit card, that cash back reward could bring your amount all the way down to . . . $1,390. Big deal. Others kick that up to 3–5% on specific transactions like travel, groceries or gas, up to a certain amount. But watch out. Certain stores don’t count depending on your card.
Other cards offer cash back incentives for a short period of time. For example, a card might ask you to spend $800 in three months and give you $200 in cash back (in the form of a check) . . . as long as you make your minimum payments.
Everyone loves free travel. And airline tickets can be pretty pricey these days, so it makes sense why earning free flights is so appealing. But are they really free? Not in the least.
Here’s how travel miles work. Just like with points and cash back, you have to spend quite a bit of money to get a free flight. So, you collect points or miles based on how far (or how often) you fly and how much you spend on your credit card (aka how much credit card debt you have). For most cards, every dollar you spend equals one travel mile. And when it’s time to redeem your miles, you’ll find that each mile is worth about a penny—(depending on the kind of card you have).
So, that $500 plane ticket is yours “free” in exchange for building up a whopping 50,000 travel miles. But remember, since $1 equals one travel mile, you’d have to spend about $50,000 to get that free flight. That’s a lot of money. But don’t forget to tack on taxes and fees . . . because your travel miles don’t cover those either. That free flight isn’t so free anymore, is it?
Not only that, airlines only reserve a certain number of seats on each plane for travelers with travel miles. That means when you try to cash in your miles, your options may be more limited than that flashy credit card brochure let on when you signed up. And don’t forget about those blackout travel dates. If you were hoping to use your points to visit Grandma in Wyoming this Christmas . . . think again. It turns out your travel dates aren’t redeemable with your credit card rewards points.
4 Dangers of Credit Card Points
1. The Allure of Cash Back, Points and Miles
One thing we can all agree on is the appeal of free stuff. That’s why you click on emails with subject lines like, “Free gift with purchase.” It’s why you’ll drop $399 on one pair of cowboy boots at the boot outlet, just to get two pairs free (do you really need three pairs of boots?).
It’s a fact—the word free will cause most of us to stop what we’re doing and run to the store. And credit card companies know this. All those “free” rewards are designed to get you to spend more of your hard-earned money. Not only that, all the sketchy rules and restrictions are buried deep in the fine print. Out of sight, out of mind, right?
Here’s the bottom line: Free isn’t always better. Make sure to do your homework, because what you don’t know or understand as a cardholder can hurt you. But if you ask us, credit card rewards (and credit cards, for that matter) are a trap! Don’t fall prey.
2. Reward Expiration Dates
Every card has its own set of expiration rules. Some points even expire after 18 months, which barely gives you enough time to rack up a significant amount of rewards.
But time isn’t the only thing working against you. The fine print also outlines several ways your points could expire. Did you know you could lose all your rewards if you miss one payment? Policies vary from card to card, but cardholders could lose all or some of their points for missed payments, card inactivity or, like we’ve said, changes to the structure of the rewards program.
3. Annual Fees
Another way credit card companies make their money is through annual fees. When they sent that glossy flyer to your mailbox, they knew you’d be lured into signing up with the promise of bonus points, rewards and “free” money. But what they hid in the details is how much their card will cost you per year in annual fees. If you don’t understand how they work, those annual fees will eat your credit card benefits for breakfast (and probably lunch too).
Let’s say your card offers airline miles and has an $80 annual fee. If you spend $8,000 on the card every year and pay it off each month, you’ll have racked up enough miles to get a free ticket in three years. Three years! And by that time, you’ll have spent $240 in annual fees alone. You could’ve already paid for your own flight with that money!
4. Interest Rate Bait and Switch
Some credit card companies love to entice you with a low introductory interest rate. You take the bait and sign up for the card. Then bam—your interest rate jumps 10% or more! No, thanks.
Think about this for a second: When you open up a credit card, you’re likely to pay thousands of dollars in interest over the years if you carry a balance. Even if you promise to pay it off every month, all it takes is one lost or missed payment for your interest rate to skyrocket, your credit score to drop, and your credit card statement to get slapped with fees. By making just one tiny mistake, you could get into a big money mess.
If you think a card’s low interest rate is too good to be true, it probably is. Don’t fall for the old bait-and-switch routine!
Want to hear more? Listen to episode two of The Fine Print: The True Cost of Credit Cards.
Manage Your Money Without Credit Card Rewards, Points and Hassles
Credit card rewards are nothing but bad news. If impulse buying and overspending come naturally to you, the pressure to spend more in order to get those points and miles will be real. Listen, after racking up $5,000 in debt on your card, you’ll be wishing you could swap out your “rewards” for a large payment toward your debt.
Trust us: There’s a better way.
Instead of relying on the credit card industry to reward you for spending . . . why not reward yourself? By living on less than you make, keeping a zero-based budget, and refusing to go into debt, you’ll be racking up so much more than you’d ever get with credit card rewards. You’ll be building a life you actually love with money you have in the bank.
But you don’t have to do it alone. We’ve got your back. Start your free trial of Ramsey+ today. You’ll start tracking how you spend your money with EveryDollar and learn how to dump debt for good with Financial Peace University.