Dubai: Rewards credit cards offer an attractive proposition, the promise of free points and miles for every dirham spent.
Many rewards cards even offer signup bonuses worth Dh500 or more at the start, and this is in addition to the rewards you earn when shopping or paying bills.
The problem? Not everyone can or should seek rewards, for several reasons. In some cases, trying to earn rewards can even damage your finances, hurt your credit score, or both.
Before signing up for a cash back credit card or travel credit card, it’s essential to know the many ways chasing points and miles can hurt you.
1. Getting into debt by seeking rewards:
A recent analysis of global credit card data found that only 45 percent of people with credit cards pay off their balance in full each month.
That means the remaining 55% have a balance at least some of the time, and it’s easy to assume that at least some of those people are looking for rewards, right?
Because the average credit card now comes with over 17% annual interest, so try to earn 1-3% by paying over 17% interest.
If you charge for purchases that you can’t afford to pay each month just for rewards, credit card rewards aren’t for you.
You’d be much better off using cash or debit as these options won’t leave you struggling with high interest debt.
2. Excessive spending to earn a signup bonus
Most cash back and travel rewards credit cards offer initial welcome bonuses to entice you to sign up.
Many times these bonuses are worth Dh500 or more in points or miles, and all you need to do is meet a minimum spending requirement (for example, spend Dh3,000 within three months of opening the account for earn 50,000 bonus points).
While these offers are tempting, they can be problematic if you have to spend more than you normally would to hit the threshold.
If your normal expenses and bills don’t match the minimum required expenses within the allotted time, what are you going to do?
Far too many people use minimum spending requirements as an excuse to buy new furniture or plan a vacation. Unfortunately, this means that the rewards they earn won’t keep them ahead financially.
They may end up with new products or an upcoming trip, but they also end up with less money than they started with, which is not gratifying.
3. Too many annual fees
And what about the annual fees charged by many of the best rewards credit cards? The best travel credit cards charge an annual fee of Dh450 or more, which is a lot of money no matter how you cut them.
While the annual fee might be worth it if you earn a lot of rewards and use the travel perks and perks regularly, it still adds up.
Before you take out too many credit cards with annual fees, make sure you have a plan to get more value than you pay for. If you can’t do it, it’s probably not worth it.
4. Damage to your credit score
Remember that the way you use credit cards can negatively impact your credit score. For example, opening new credit cards means having another serious question on your credit report, which could temporarily lower your score.
Since your payment history is 35% of your credit score, falling behind on your credit card bills can also create a big problem.
With your credit usage (the amount you owe against your credit limits) accounting for an additional 30% of your score, carrying large balances can also hurt your score.
The bottom line
Credit cards that give out points and miles may help you earn free trips, earn money, or get other freebies, but that doesn’t mean they’re meant to get better. Ultimately, how you use your credit cards will determine if they are good for your finances.
Before signing up for a rewards credit card, it can help to have a basic plan in place. Find out how you can earn a big signup bonus without making any unexpected purchases, and make sure you have the discipline to pay off your balance in full each month. From there, make sure you only pay annual fees on cards that are worth the money.
If that sounds like too much work, then it probably is. Reduce your losses and opt for throughput instead.
Are you considering a credit card? Here is a warning
While using debit online can be riskier and less rewarding, it’s still important to determine if you’re a candidate for using a credit card.
While credit cards offer better fraud protection, the potential for rewards, and valuable protections for consumers, they can make overspending and debt easier.
Before signing up for a credit card and starting to use it for your purchases, it’s important to make sure that you’re committed to staying on budget and only spending what you can afford.