Do Rewards Credit Card Make up for Bad Interest Rates?

Sep 2018 | Team Rubique

It is a universally known fact that credit card rewards are a way of luring people to open an account. Their attractive reward programs include free air miles, all-expense-paid vacations, free dining, and discounts on partner merchant network; and cash backs. However, one must spend responsibly in spite of the rewards being offered. If handled with discipline, credit cards can be helpful financial tools. The credit card companies make most of their money in the form of interest rate levied on purchase made, annual fees charged to the patron and the transaction fees levied to the merchants that accept credit cards.

It is a common query among customers whether the earned credit reward points are enough to cancel out the negative effects of interest charges. Although in the outer peripheral it might seem to ease out the impact of hefty interest rates, in most cases, one may end up risking his finances.

Credit card companies comprise of two kinds of enterprises; namely, Issuers and Networks.

Issuers: They mainly issue credit cards to the patron; finance expenses and process payment transfers. They make most of their money through the hefty interest charges, and fees levied on the handling of a credit card. Some common types of credit cards are the ones exclusively meant for travel, dining, retail and under a partnership with various brands.

Networks: Networks are simply payment processing systems which allow financial institutions to brand their cards and use their payment gateways. They make money from the transaction fees they charge banks to utilize this arrangement. Therefore, when a credit card is swiped, the money moves electronically from the issuer, through the network, to the merchant’s bank. It is the payment gateway’s responsibility to make sure that the transaction is credited to the appropriate account holder so that the issuer can subsequently proceed with the billing.

Do rewards credit cards make up for bad interest payments?

First of all, one must never default on his credit card payments. Non-payment month-on-month can risk interest accumulation and eventually the rewards will not be worth the risk. Also, it is better to enroll for a card with little or no annual fee. This way one can expect to get more out of the annual fee he shells out each year. It is advisable to read the terms and conditions properly before applying for the reward card so that there are no difficulties while redeeming the points. The reward card comes handy only when one keeps a check on his spending habit and chalks out a budget which he will be able to take care of every month end.

Reward credit cards are a way of keeping a constant financial flow in the customer’s account either through purchases from brand partners or through other attractive offers by the card issuer. All this is so alluring that most of the time, people end up overspending than their budget permits.

It is foolishness to be in credit card debt and expect a handsome monetary return in the form of reward points and cash backs. All arrears must be paid in full before making new expenditures or opening a new credit account. Developing a willpower of restraining from unnecessary expenditures is the main factor in avoiding credit cards from giving trouble in the long run. Experts suggest creating a “Debt payment Plan” which would assist in paying off debt faster and also save on interest. This, in turn, would make the reward card seem sensible.

Redeeming the credit card reward points and bonuses can be quite exciting at times whereby one can shop without paying hard cash or swiping electronic cash. This usually makes the rewards seem like a winner compared to the pesky interest rates. However, it’s not advisable to let these temporary perks blur one’s perception. Interest charges are a financial menace. It is even more unwise to swipe the card for each and every purchase small or big. It might seem lucrative that with every purchase, cash-backs or reward points roll back into the account. However, in the long run, if unable to pay off the outstanding amount plus the interest charged over it, the interest charges can pile up posing a humongous problem for the cardholder, leaving no scope for unforeseen crisis situations.

Sensible customers know when to cut their costs. In order to avoid paying extra money to the banks, some customers follow some simple steps like:

  1. Clear off the outstanding dues in full every month to avoid annoying interest charges.
  2. Setting up alerts such as emails, SMS alerts, postal emails that notify the dates the payments are due, to avoid late fees.
  3. Maintaining an urgent fund to avoid expensive alternatives like cash advances.
  4. Avoiding a credit card with ‘balance transfer fees’.
  5. Opting for a credit card with annual fees only when the rewards exceed the expense outflow on the card.

Experts are of the opinion to never mix up the idea behind rewards and interests. It is better to enroll for low interest or 0% APR credit card if at all it is necessary to use it for daily expenses. A rewards credit card is recommended only when one’s finances are sorted, and he can afford to fully pay off all outstanding dues along with interest charges every month. This is the ideal way to make maximum benefit out of a rewards credit card.

It is totally up to the customers to avoid unsavory incidents related to the hefty outflow of money from his pockets. Reward points and welcome bonuses may seem lucrative, but the annual fees and interest rates also are no less awful.