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October 17, 2006
Are Credit Card Rewards Really Saving You Money?
Consumers are bombarded with credit offers both from traditional banks and from retail outlets.
The marketing strategy used by both the banks and retail stores to entice you into using their financial offering is usually a points system where you typically earn travel or cash back on purchases with your Visa or MasterCard or points towards store purchases in the case of retail charge cards.
Both offerings do persuade consumers to apply for credit but consumers need to be wary of both offerings.
The tendency for most people is to jump on a credit offer to capitalize on the “free stuff” that comes with the line of credit. The free stuff and bonuses are certainly worthwhile but only if you have excellent budgeting habits.
While you can earn cash or points towards merchandise for using the card, the points are only worthwhile if you are not incurring charges on hidden fees and interest.
I am writing this because of a story I read in Time Magazine. The story goes like this:
A consumer holding a Kohl’s credit card purchased a pair of shoes for $45.08 but because of making a payment only 2 days late a penalty of $25.50 was charged. Suddenly the actual cost of those shoes is 70.58!
It’s not only department store credit cards that tack on late charges, credit cards issued by major banks usually have similar late fees.
If you think you are getting bonuses on your cards I suggest you stop right now and go check the terms and conditions on your account. You might be surprised at what you find.
Let’s go over this scenario:
You earn 1% cash back on purchases
Your purchase of $45.08 would earn you a measly 0.45/annum
If you don’t pay your entire balance every month the interest on the average credit card would cost you roughly $4.00/annum
Now what reward did you actually earn? You earned nothing!
$4.00 - $0.45 = $3.55
In this scenario you pay $3.55 in interest charges!
There’s no reward there!
Rewards programs are put in place to encourage you to use your credit card more frequently.
The card issuers are banking on the hope that you do not pay your balance in full.
Read the fine print on your card holder agreement to be sure that you are not paying too much in interest charges and other associated fees.
Purchase only what you normally would with cash, pay your balance in full and on time and only then are you actually earning anything.
On a monthly basis break out the calculator to ensure that the rewards are actually putting money in your pocket.
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