Even if you already have a rewards card, you’ve probably seen an unbelievable number of offers from the credit card companies in your mail lately.
In just the third quarter of 2010 – around 1.2 billion offers for new credit cards were sent out. Compare that to the 391 million mailed to consumers during the same time period in 2009.
80% of those offers were for cards connected to a rewards program. They promise to help you earn cash back incentives or gain airline miles. At first it sounds like a pretty good idea. They’re going to pay you to spend money…right?
Here’s why you may want to think twice about applying for a rewards credit card.
Americans have been hesitant about using credit cards because of the recession and ongoing economic struggles. TransUnion reports that eight million people stopped using their credit cards in 2010.
For a while, credit card companies were also reluctant to extend credit to people – but that’s changing. The credit card companies want your business again – so they’re tempting you. They’re dangling a carrot in front of your nose.
Getting checks from your credit card company sure seems like a nice role reversal. Usually you are the one writing out personal checks to pay them.
But the first fact you should realize is that rewards cards almost always have a higher interest rate than credit cards without all the bells and whistles. So if you do end up being unable to pay off the balance each month, you’re going to end up paying out your butt.
Even if you think you’re earning money by using a credit card…the truth is…you’re probably spending more!
According to a new study by the Federal Reserve Bank of Chicago, cash back credit cards typically prompt users to overspend and go into debt.
Researchers found a 1% cash rewards program gives the average user a $25 reward each month. Not too shabby. But it also leads to an average increase in spending of $68 a month. Plus, credit card debt increased to an average of $115 a month.
Economists who worked on the study, which will be presented at an upcoming American Economic Association meeting, say one reason debt grew even faster than spending could be that while people spent more, they paid less down on their credit card debt.
Now to be fair – I know there are a lot of people who do take advantage of rewards credit cards.
What it all boils down to is that you need to be aware of the temptation to spend more. It’s kind of similar to being lured into a sale at a store when you don’t need to buy anything. You feel like you’re saving 30%, but really you’re spending money you never would have spent in the first place.
As long as you can write that check to pay down the full balance every month – a rewards card could be a useful tool. But if you find yourself unable to resist the temptation to overspend, consider choosing a different way to pay.
Don’t forget – credit card companies make money off of you when you go into debt. Getting you to spend more in order to claim your “rewards” is exactly what they want you to do. Don’t fall for the trap!
You can read the complete study from the Federal Reserve Bank of Chicago and watch the BankRate.com video below for more helpful information on rewards cards.
Image Credit: me and the sysop
Kasey Steinbrinck blogs regularly on economic news and personal finance issues for Check Advantage. Visit the site today and find everything from cool personal checks to deposit slips.