Understanding Credit Card Offers

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By Sarah Netter

From cash in your pocket to myriad discounts, even free plane tickets—rewards points are a popular credit card perk.

A 2015 study of more than 20,000 credit card customers found that 52 percent selected their new credit card based on rewards programs. And 67 percent of credit card holders use cards that offer at least one financial benefit.

But the study also found that people who have rewards cards and credit card benefits spend more. In the case of rewards cards, customers who have one spend an average of $1,132 per month, compared to $744 for customers who don’t have a rewards card—a whopping 52 percent difference.

Here’s how to make smart choices and avoid pitfalls when it comes to choosing a credit card.

Travel and merchandise rewards
Pros:
Frequent travelers or shoppers can rack up serious points to put toward free plane tickets or hotel stays.

Cons: Annual fees can cancel out your rewards points.

“Rewards cards typically have an annual fee, so you need to be sure the rewards are worth it,” said Melinda Opperman, chief relationship officer for credit.org.

A reward card might offer 4.5 percent back on travel expenses, for example, but it has an enormous annual fee. “You’d have to spend more than $10,000 on travel expenses each year for the rewards even to make sense,” she explained.

Make sure to do the math and read the fine print.

“Like our grandmas used to tell us, sometimes when it sounds too good to be true, it could be,” she said. Annual fees for some rewards cards cost anywhere from $100 to $450, she explained. “We couldn’t believe it.”

On the other hand, she said, low- or no-fee rewards cards can be extremely useful for customers who are able to pay off their bill every month.

Cash back
Pros:
It’s extra money in your pocket for purchases you’d make anyway.

Cons: Annual fees and interest rates can cost more than your cash back rewards.

As with the rewards cards, Opperman said, be aware of the annual fees and pay off the card each month.

About 33 percent of Americans keep some kind of balance on their credit cards, according to a Gallup survey.

“A lot of people are carrying balances,” Opperman said. “Are you really coming out ahead with the cash back or are you just incurring finance costs?”

She advises consumers to check the card’s terms for payment grace periods, or the time between when the billing cycle ends and the payment is due. The CARD Act mandates at 21-day grace period, but it is a sign of a better card if it offers a 25-day grace period.

There is an opportunity to reap the rewards of cash back offers, she said, “as long as you’re aware of potential debt traps.”

Zero percent interest
Pros:
You can pay down debt without interest charges.

Cons: Balance transfer fees often apply, and interest is often high after the introductory rate.

These cards are great debt pay-down tools, Opperman said, as long as you pay attention to potential drawbacks, namely balance transfer fees and high APRs after the introductory rate.

Some cards offer zero percent balance transfers but others don’t, meaning you could pay more in transfer fees than you would save in interest.

Opperman has had clients with several hundred dollars in balance transfer fees.

Make sure you know the interest rate that will kick in after that introductory rate, usually one year.

“If they get their card paid off within that first year of that 0 percent APR, it could be a great way to get out of debt,” she said.

But many don’t do that. A study by the British marketing agency Consumer Intelligence found that 34 percent of cardholders—more than one-third—don’t pay off their balances before the end of the introductory period.

Cash advance
Pros: It’s quick money in your pocket.

Cons: You will pay more in the long run for the cash.

Opperman advises clients to stay away from cash advance offers, noting that the interest rate on that money is much higher than for regular card purchases.

And it’s all too easy to take out some quick cash, but bury yourself deeper in debt because of it when the interest charges quickly rack up.

“Cash advances should be avoided at all costs,” she said. “Signing up for one of these new credit cards with the cash advance concept in mind is basically planning to fail.”

So how can you make your credit card work for you? Here are some of Opperman’s tips.

·       Find a card with a good interest rate. Right now, she said, the standard credit card interest rate is 17.49 percent. Look for cards with interest rates closer to 9 percent.

·       If you transfer your balance to a new card, make sure to check back with that previous card to make sure there aren’t any last minute charges that need to be paid. Forgotten charges are not uncommon, Opperman said, and can destroy your credit if they aren’t paid off.

·       If you frequent a store often, consider signing up for that store’s credit card. As long as you can pay off the balance each month, these cards offer everything from cash back to rewards points to special savings.

·       Rewards and cash back may seem lucrative, but piling on purchases to reap those perks can do more damage to your credit in the long run.

“You don’t want to just be using credit to delay dealing with your financial struggles,” Opperman said. “Opening these new accounts or transferring balances is just going to buy yourself a little more time.”

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