When trying to effectively
manage a budget, it is tempting to look to credit card rewards to help make your money go a little further. This can be a great strategy for improving your year-end bottom-line, but it is important to fully understand how credit card rewards work in order to get the most from them. There are a number of misunderstandings surrounding these highly sought-after perks, and here we'll clear up some of those misunderstandings by dispelling 5 common myths about credit card rewards.
Myth 1: I Need Excellent Credit to Receive Rewards Cards
A common misperception is that reward cards are only available to those with the best credit. It is true that some of the most sought-after rewards cards require her credit ratings. But there are still many rewards options available to those who are working on building or repairing their credit.
For example, the Discover it Secured Card is designed for people with lower credit scores, and offers 2% cash back on dining and gas, and 1% on all other purchases. Plus, at the end of your first year, they will match all of the cash back rewards you earned to date, making this a great card for those starting their credit journey.
Myth 2: I Shouldn't Consider Sign-Up Bonuses
Many credit cards offer generous sign-up bonuses to new card users. For example, many cards offer a $150 reward for spending $500 in the first 90 days.
As a consumer, it's always good to be a little skeptical, and some might think that these sign-up bonuses must be too good to be true. But don't be fooled: these deals really are as good as they seem. With so many competitors offering rewards, banks need a way to stand out, and so sign-up bonuses are used by credit card issuers to attract new customers.
These bonuses are often great deals, so definitely don't ignore them when you're deciding which cards to apply for. The one caveat here is that you should make sure you can afford the initial spending requirement before you go after it. Some of the premium cards require as much as $3,000 in spending in 3 months, and it is unwise to chase that reward if it will break your budget.
Myth 3: Travel Miles Are Always The Best
With all of the hype surrounding travel cards, it can seem like it is only worth pursuing cards that offer miles as their primary reward system. While heavy travelers can do quite nicely by relying on travel-specific cards, many consumers will actually be much better off using standard cash back rewards cards.
Travel rewards can sometimes be inflexible or difficult to redeem, and often require paying an annual fee that can negate any advantage. So make sure to research your alternatives carefully to see what works best for your spending habits.
Myth 4: It is a Bad Idea to Have Multiple Rewards Cards
There is a common idea that it is foolish to own too many credit cards, and that it is silly to be the kind of person who fumbles around in your wallet trying to figure out the best card to use on each occasion.
If you prefer simplicity, there is nothing wrong with having one or two main "go-to" cards. However, many people who are hoping to maximize their credit card rewards wisely opt for a variety of cards with distinct perks.
Many cash back rewards cards offer higher discounts for purchases made in specific categories. For example, some offer 3% back at grocery stores, others offer 3% off at restaurants, others offer 3% off of travel purchases, and so on. Most of these specialized cards offer a lower flat rate of 1% off all other purchases outside of their specialized category.
The difference between 1% and 3% might not seem like a lot in most individual transactions, but over time, the savings can add up. For example, if you spend $100 on groceries every week, you might earn $52 per year at 1%. At 3%, however, you are looking at $156 in rewards - a difference of $104! And if you do that year in year out, you wind up saving quite a bit over the long haul. And the benefits are magnified when you do this across other categories as well.
So, if you're up for the task of keeping track of different reward categories, it can be well worth the effort.
Myth 5: If I Get New Rewards Cards, I Must Cancel My Old Non-Reward Cards
Our final myth is the idea that every time a person gets a new rewards card, they must also give up one of their old cards. This is not true, and is in fact not always the best idea.
In general, there are no penalties for having more credit cards in your wallet. In fact, there may be a number of benefits. Keeping your older accounts open for longer can help to improve your overall average age of credit, which improves your credit score.
Also, the percentage of your available credit that you use (your "utilization") makes up another significant component of your credit score. So if your total available credit goes up by getting new cards while your spending stays the same, you may improve your credit utilization. Closing old accounts removes some of your available credit, possibly increasing your utilization, thus lowering your score.
So even if you don't use your old cards very much, try to keep those accounts active for the boost they give to your credit score. So long as they don't carry any annual fees, you can keep your old cards right next to your newer rewards cards in good conscience.
Conclusion
Credit card rewards offer great benefits to many consumers, and the savings they offer can really add up over time. As always, it is important to use credit responsibly and not spend more than you can afford to pay back. But with wise planning and responsible use, credit card rewards can be a great way to make your money go further.
