Tips to Avoid Extra Costs of Rewards Credit Cards

Having a rewards credit card in your pocket can be beneficial if you’re a heavy credit card user. The more you spend, the more rewards you earn, the more travel and merchandise you can get with your rewards. But, rewards credit cards come with some extra costs. If you’re not aware of these costs and how they affect your rewards, you could end up paying more for the rewards than they’re actually worth.

High Interest Rates
The ideal credit card gives heaps of rewards while offering low interest rate on credit card balances. Good luck finding a card like this. Instead, what you’ll see a lot of are rewards credit cards with higher interest rates than non-rewards credit cards. So, if you’re a big spender and you’re not in the habit of paying your credit card balance in full every month, you could end up paying high finance charges on your rewards cards.

The problem with paying more in finance charges is that it decreases the worth of your rewards. Say, for example, you spend enough to gain $150 rewards in a year. But, you don’t pay your balance in full each month and you end up paying $200 in finance charges that same year. You’ve paid more carrying that balance than you’ve received in rewards.

To keep interest charges from cancelling out your rewards, pay most, if not all, of your credit card balance each month. Keeping a low balance will lower your interest charges and the cost you pay for your rewards.

Many rewards credit cards offer interest-free days. Take advantage of the interest-free time by paying off your balance to avoid finance charges. You’ll get the benefit of the rewards without any extra cost.

High Annual Fees
Rewards credit cards don’t keep their annual fees a secret. What they do keep mum about is the annual fee could cancel out your reward if you don’t accumulate a certain number of rewards during the year. Consider a rewards credit card that has a $79 annual fee. If throughout the year, you only accumulate enough rewards to get a $40 gift card, you spent $39 unnecessarily. You need to earn $79 in rewards just to break even on the annual fee, more than that to make the card valuable.

Look for a rewards credit card with a low (or no) annual fee. The higher the annual fee, the more you need to spend to break even on the cost.

Evaluate the rewards system based on the amount you spend throughout the year. You might have to do a bit of arithmetic to figure out if the card is right for you, but it’s better than wasting money just to get more rewards.
In the end, the value of your reward should exceed any annual fee you pay.

Lower Rate Balance Transfers
Quite a few rewards credit cards offer a lower interest rate on balance transfers. However, they don’t apply rewards points to balances that are transferred. This means you must still make purchases to accumulate rewards.

Now, the catch is that credit cards have a practice of applying payments first to lower interest rate balance transfers until the transfer is completely paid. Meanwhile, any purchases balance accumulates finance charges at the higher interest rate. Earlier, we talked about how higher interest rates can cancel out rewards.

If you use your rewards card for a balance transfer, repay the transfer before you make any purchases with the card. This way you’ll avoid the heavy hit from finance charges on higher interest rate balances.
Keep in mind, too, that the lower interest rate on balance transfers only lasts a few months, usually between 5 and 12.
Pay off the balance transfer before the low rate expires or you’ll be paying higher charges on the balance.

Use the Cost to Choose Your Card
When you’re shopping around for a rewards credit card, use what you know about the extra costs to help you choose a card. Look for one with an interest-free period, low interest rate, and interest-free days.
Then, once you start using your card, continue to remember the ways you could get trapped into paying extra fees and interest rates.

Mike manages a an Australian credit card application site. Find out more information on Australian reward programs here.