Choose Your Rewards Card Carefully

Smart consumers use a rewards credit card for their everyday spending, which helps put a bit of money back into their pockets in the form of cash back or travel rewards.  But if you’re not careful with your spending, a rewards card could end up costing you money.

The Federal Reserve Bank of Chicago released a study saying that the initiation of a 1% cash back rewards program gave customers an average reward of $25 a month – however their total spending increased by $68 a month.

Related: Do You Put Groceries On Your Credit Card?

Remember that if you carry a balance on your credit card from month-to-month, you’re trading a 1% rebate for 19% credit card interest rate.  Not a good deal!

What to look for in a rewards card

Some rewards programs come with an annual fee and place restrictions on how you redeem your points.  Members need to weigh the benefits of the rewards that are offered against the fees and restrictions in the program.

Consider the following tips when choosing a rewards card:

Before applying for a rewards card, take a look at your overall spending to figure out if one card’s category multipliers (i.e. 4% back on groceries, 2% on gas) works better for you than another card with different multipliers.

A rewards card that earns 2% cash back across the board might not make you as much as one with multipliers if you spend a lot in those categories.

Related: Best Cash Back Credit Cards

Be careful of offers that claim high rate of returns on cash back as those typically only run for a short duration at the beginning of your rewards card membership.  After the introductory period the cash back level can drop-off significantly.

Also watch for rewards cards that limit the amount of cash back or travel points that you can receive in a year.  If you’re a big spender, make sure you get a rewards card that doesn’t cap your earnings.

Annual fee credit cards only make sense when you make use of some of the benefits tied to that card.  For example, when you rent a car for 5 or more days once a year the collision damage waiver coverage that comes standard with most premium credit cards will save you $20 to $30 per day.  After 4-5 days that will have paid off your annual fee.

If you don’t think you’ll use any of the benefits associated with the rewards card you may be better off going with a no fee rewards credit card.