BEWARE OF REWARD PROGRAMS THAT LEAD TO MORE CREDIT CARD DEBT

Have you ever signed up for a credit card to get sign-on bonus points in a reward program? Or found yourself using a credit card to make a purchase you would not have otherwise made to meet the requirements of a loyalty points promotion? If so, you are not alone.

Rewards programs are created explicitly by credit card companies to incentivize you to use your credit card – and use it often. Credit card rewards programs seem like a win-win: the credit card company benefits because you use their card, and in exchange, you get a perk such as Air Miles, cashback, or loyalty points. Unfortunately, the significant risk with credit card reward programs is that they encourage consumers to overspend. Our Edmonton debt counsellors see time and again that these credit card reward programs only pay off for the credit card companies who collect interest on outstanding balances at shockingly high rates.

REWARD PROGRAMS ENCOURAGE SPENDING, WHICH CAN LEAD TO DEBT PROBLEMS

Reward program design encourages you to take out multiple credit cards and use your credit cards as often as possible, leading to overspending and unmanageable debt. If you are spending beyond your budget or buying items to get the points, you will likely have problems paying your credit card’s total balance when it comes due. Credit card interest rates are staggeringly high, and all it takes is one missed payment to start to get into debt trouble. The credit card interest rate comparison section shows the differences in borrowing costs based on different interest rates. High-interest fees and damage to your credit score are the two highest costs of “free” rewards programs. Once credit card debt begins mounting, it can be impossible to pay off.

REWARD PROGRAMS ARE NOT REALLY "FREE"

While rewards programs and loyalty points are marketed as accessible or as a bonus, they are not in many cases. Credit cards that offer rewards or cash-back incentives come with an annual fee, so you pay for any rewards you may receive. When you do the math, the yearly price for a credit card or any interest you will pay if you carry a balance is likely much higher than the value of any reward program benefits you could hope to receive in a given year. It is also essential to weigh the value of any points, Air Miles, or cashback you could earn against how much you have to spend to get that benefit. Look at the comparison of credit card rewards and benefits section here for examples of estimating the reward program’s potential value, which can help you determine if it is worthwhile.

CREDIT CARDS DON'T HAVE TO BE DANGEROUS

In a previous post, our Edmonton bankruptcy trustees discussed the importance of having a credit card and how a credit card can be a beneficial financial tool. It all depends on how you use your credit card and manage your finances. For example, if used wisely, credit cards can help you build a good credit history, and they typically offer better fraud protection than debit cards. Credit cards can also come in handy as a last resort in emergencies. And, of course, credit cards offer rewards and incentives that can provide a little perk for using them – but only if they are appropriately used and only if you recognize that the rewards are not “free.”

HOW TO AVOID THE REWARD PROGRAM TRAP

Watch for introductory low-interest-rate offers and carefully evaluate whether a rewards program’s potential benefit is worthwhile. Resist the urge to apply for new credit cards to get a discount on that day’s purchase or a sign-on points bonus. The more lines of credit you have, the more difficult it can be to manage debt. It is also imperative to read the fine print. For example, there are always limits on what you can receive cashback percentages on, and it is likely much more restrictive than you realize.

If you use your credit card sparingly – only to buy things you need and can afford – and you can pay your credit card balance in full each month when it comes due, the points can be a nice perk. But if you spend beyond your means and use your card for purchases you do not need, you will likely put yourself into debt that will be difficult to remedy. So, before using your credit card, ask yourself whether you can afford it and whether you need the item you are purchasing. Only use your credit card when you need to, never to get reward points.

WHAT TO DO IF YOU GET INTO CREDIT CARD DEBT

If you get into credit card debt, do not wait for help to address it. There are solutions to help you find your way out of any financial hole, such as debt consolidation or a consumer proposal. The debt counsellors at Fox-Miles & Associates Inc can also provide credit counselling to individuals and couples. We pride ourselves on providing the best debt solution for each client by personalizing the service to each unique circumstance. We help our clients understand each step of the process, so they can avoid sliding back into credit card debt in the future.

Contact Us

Our licensed insolvency trustees and debt counsellors at Fox-Miles & Associates Inc. specialize in relieving financial distress by providing debt solutions. We provide helpful financial advice from compassionate, qualified credit counsellors serving the Edmonton area, including Sherwood Park, Fort Saskatchewan, St. Albert, Spruce Grove, Stony Plain, Leduc, Hinton, and Edson. Your first consultation is free, so call our offices today at 780-444-3939 to arrange your appointment. Let us talk about your options and the ways we can help.