26/11/2019 0 Comments
Beware of Reward Programs That Lead to More Credit Card Debt
Have you ever signed up for a credit card to get sign-on bonus points in a reward program? Or found yourself using a credit card to make a purchase you would not have otherwise made, just to meet the requirements of a loyalty points promotion? If so, you are not alone.
Rewards programs are specifically created by credit card companies to incentivise you to use your credit card – and use it often. Credit card rewards programs are made to seem like a win-win: the credit card company benefits because you use their card and in exchange, you get a perk such as Air Miles, cash back, or loyalty points. Unfortunately, the big risk with credit card reward programs is that they encourage consumers to overspend. Our Edmonton debt counsellors see time and again that these credit card reward programs really only pay off for the credit card companies who collect interest on outstanding balances at shockingly high rates.
Credit cards don’t have to be dangerous
In a previous post, our Edmonton bankruptcy trustees discussed the importance of having a credit card and the ways that a credit card can be a beneficial financial tool. It all depends on how you use your credit card and how you manage your finances. For example, if used wisely, credit cards can help you build a good credit history and they typically offer better fraud protection than debit cards. Credit cards can also come in very handy as a last resort in emergency situations. And of course, credit cards offer rewards and incentives that can provide a little perk for using them – but only if they are used properly, and only if you recognize that the rewards are not “free.”
Reward programs are not really “free”
While rewards programs and loyalty points are marketed as being free or as a bonus, in many cases, they are anything but. Credit cards that offer rewards or cash back incentives typically come with an annual fee, so you are paying for any rewards you may receive. When you do the math, the annual fee for a credit card or any interest you will pay if you carry a balance is likely much higher than the value of any reward program benefits you could hope to receive in a given year. It is also important to weigh the value of any points, Air Miles, or cash back you could earn against how much you have to spend to get that benefit. Take a look at the comparison of credit card rewards and benefits section here for examples of how to estimate the potential value of reward program, which can help you determine if it is worthwhile.
Reward programs encourage spending, which can lead to debt problems
Reward programs are designed to encourage you to take out multiple credit cards and to use your credit cards as often as possible, which can lead to overspending and unmanageable debt. If you are spending beyond your budget or buying items just to get the points, you will likely run into problems paying the full balance of your credit card when it comes due. Credit card interest rates are staggeringly high, and all it takes is one missed payment to start to get into debt trouble. The credit card interest rate comparison section here shows the whopping differences in costs of borrowing based on different interest rates. High interest fees and damage to your credit score are the two most significant costs of “free” rewards programs. Once credit card debt begins to mount, it can feel impossible to pay off.
How to avoid the reward program trap
Watch out for introductory low interest rate offers and carefully evaluate whether the potential benefit of a rewards program is worthwhile. Resist the urge to apply for new credit cards to get a discount on that day’s purchase or a sign-on points bonus. The more lines of credit you have, the more difficult it can be to manage debt. It also very important to read the fine print. For example, there are always limits on what you can receive cash back percentages on, and it is likely much more restrictive than you realize.
If you use your credit card sparingly – only to buy things you need and can afford – and you are able to pay your credit card balance in full each month when it comes due, the points can be a nice perk. But if you spend beyond your means and use your card for purchases that you do not need, you will likely put yourself into debt that will be difficult to get out of. So, before using your credit card, ask yourself each time whether you can afford and whether you need the item you are purchasing. Only use your credit card when you need to, never just to get reward points.
What to do if you get into credit card debt
If you get into credit card debt, do not wait to get help to address it. There are solutions out there to help you find your way out of any financial hole, such as debt consolidation or a consumer proposal. The debt counsellors at Fox-Miles & Associates Inc can also provide credit counselling to individuals and couples and we pride ourselves on providing the best debt solution for each client by personalizing the service to each unique circumstance. We help our clients understand each step of the process as well, so you can avoid sliding back into credit card debt in the future.
Get Relief From Credit Card Debt in Edmonton Today!
Our licensed insolvency trustees and debt counsellors at Fox-Miles & Associates Inc. specialize in relieving financial distress by providing debt solutions. We provide helpful financial advice from compassionate, qualified credit counsellors, serving the Edmonton area including Sherwood Park, Fort Saskatchewan, St. Albert, Spruce Grove, Stony Plain, Leduc, Hinton and Edson. Your first consultation is free, so call our offices today at 780-444-3939 to arrange your appointment. Let’s talk about your options and the ways we can help.