It is very common to hear financial experts telling people to stay away from credit cards at all costs – they are evil, steer clear! It is true that if abused or used improperly, credit cards can be a dangerous temptation and, in many cases, can lead to consumers facing a never-ending cycle of minimum payments, skyrocketing principal balances, and, ultimately, total financial destruction. For many people, managing credit card debt can be an unrecoverable tailspin.
Despite the risk, credit cards are also very valuable tools, and can even help build wealth. To encourage people to use their cards, most financial institutions offer a reward program when purchases are made. The difference between someone who will reap the benefits of using a credit card wisely and someone who will drift into an unhealthy amount of debt is how you manage your money and your accounts. While it is not wise to use credit cards to purchase items you cannot afford, using a credit card can give you rewards that a simple debit card will not.
A rewards credit card is what it sounds like – a credit card that rewards you when you make purchases with it. Here are some common rewards offered:
These types of reward cards are straightforward – when using a , for each purchase that is made, a percentage is accumulated in cash that you can use for various purposes. For example, let’s say the card offers 4% back on purchases. When using the card to purchase a $100 item, the user will earn $4 in rewards. These types of cards are good for people who plan to just use one card when purchasing items.
Points and Miles
Points and miles-based reward cards work in the same fashion. Instead of earning cash, you earn either points or miles that can be exchanged for items or travel. Just like with cash-back cards, you usually earn points or miles based on a set rate. For example, it could be you earn a point for every dollar you spend. Understanding exactly how much you are being rewarded can be a little more complicated compared to cash-back cards so you may need to get out the calculator to determine the true dollar amount of your reward.
Maximizing Your Credit Card Rewards
While it will take some planning and managing your money properly, you can further optimize your rewards by using some of the following strategies:
Use A Combination of Rewards Cards
Some cards offer a greater percentage back when used in a specific category such as travel or fuel. Maximize how much you can earn by knowing these categories and using each card wisely.
Take Advantage of Sign-Up Bonuses
Some rewards cards offer special bonuses if you spend a certain amount of money within a specific time frame. These bonuses can be worth hundreds of dollars!
Understand How Much You Are Getting Rewarded
Once again, a cash-back reward is easy to understand. However, some rewards cards offer gift cards, travel purchases, or online shopping credits. This is where you need to take some time to do the math to see which reward is best.
Pros And Cons of Using Rewards Cards
While it is always nice to earn money, there are some things to consider before signing up for a rewards card. Here are some pros and cons of using one:
· Earn a reward (cash-back, miles, etc.) on every purchase you make
· Can redeem rewards and save money on things such as travel and online shopping
· Many do not charge an annual fee
· If you are not disciplined, you could spend more than you should in hopes of getting more rewards
· You have to be aware of redemption schedules to make sure you don’t miss out
· Some charge an annual fee and/or require you to have excellent credit
If you plan to get a credit card and are disciplined enough to make sure you have the money to pay off the balance every month, it is a good idea to apply for one that offers some type of reward. In simple terms, choosing a card that doesn’t offer rewards is like finding money in the pocket of jeans you wore months ago and just leaving it there. Credit cards can be a tremendously valuable tool to use for day-to-day purchases if you are disciplined enough to save the cash that you would have spent on those items and pay off your balance in full every month. This can be a slippery slope, so proceed with caution!
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