It’s A Trap! The Myth Of Credit Card Rewards

The credit card point system. The darling of the credit card industry.

If you talk to the average US consumer, they’re seemingly obsessed with the various rewards they think they’ll earn using the right credit card. They believe taking on credit card debt will allow them to live a higher quality lifestyle using the free airline miles, cash back or even hotel rooms they earn with the credit card point system.

“It was money I was going to spend anyway!” is their rallying cry.

However, study after study has proven we spend a minimum of 20% more than we normally would when we use a credit card instead of another form of payment. So, does living your life in pursuit of credit card rewards make financial sense?

Let’s run some numbers together, and take a closer look.

I Get Cash Back!

The average cash back amount for a credit card in the US in 2017 is 1%. Yes, that’s it. One percent. That means for every $100 you spend, you’ll earn exactly one dollar. According to Time Magazine, in 2016 a typical household in the US carried an average of $16,061 in credit card debt. Running the numbers again, that means that same household only earned $160.61 in cash back. No, that’s not a typo.

But wait, add in the interest rate that averages 16.24% in the US, and suddenly you’ve just paid another $2,608.30 to earn $160.61. (Here’s how compound interest works against you.)

That free money doesn’t seem so free now, does it?

I Get Airline Miles!

We’ve all seen the advertisements encouraging us to sign up for the latest card that promises large amounts of miles just for opening up the account.

Experts call this “chasing rewards.” You make purchases or open credit cards you wouldn’t normally just to get the points. Most people who end up with high amounts of credit card debt attribute their problem to chasing rewards.

Have you ever tried to book a flight using your miles? Airline miles are notoriously difficult to redeem. Most airlines have blackout dates preventing you from traveling when you want and still charge you fees to redeem your “free” miles. Airline rewards cards usually have higher interest rates than other credit cards in addition to an annual fee.

Still…. the whole concept sounds tempting. So what does the process look like in real life?

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