Are Credit Card Rewards Worth Today's Sky High Interest Rates?
Don't let chasing credit card rewards hurt your financial future.
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📰 Interesting financial news
Banks are building more branches for the first time in a decade. (Yahoo Finance)
Inflation has caused many adults to stress out about finances. (CNBC)
How to adjust your portfolio for inflation, deflation and other “flations”. (Kiplinger)
📈 What’s popping in the stock market
Chipotle’s board approved 50-for-1 stock split; pending approval at their annual shareholder meeting in June. (Ticker Symbol: CMG)
How much a $1,000 investment in Chipotle stock 10 years ago is worth today.
The three companies leading the Artificial Intelligence (AI) race and their stock market performance.
📝 Main topic: Credit reward points vs credit card debt
Reward points are one of the perks of using a credit card. Making purchases that can help you get free flights, cash back, free hotel stays and more is an enticing offer. However, this system may keep more people in debt.
Americans accumulated $1,129 trillion in credit card debt in the last quarter of 2023. This large number can make you wonder if the perks of collecting points for freebies outweigh the potential for debt.
Nonetheless, credit cards are a valuable tool if used wisely. So, to help you use that rectangular piece of plastic to get more benefits and less debt, we’ll share some tips on spending and credit card management.
But first, let’s take a closer look at the state of credit card debt in the U.S.
What’s going on with credit card debt in America?
Credit card debt has steadily increased over the past three years, particularly in the last quarter. And it looks like it’s not going to decrease due to inflation, high interest rates, and other economic factors.
Looking closely at interest rates, in late 2023, the average APR for credit cards was 21.47% now, it’s 24.66%, the highest since 2019.
With these high rates, you may wonder if earning reward points is worth the investment. Well, it depends on how much you’re spending and whether you can pay off your balance every month.
On average, reward points or cash-back cards offer a value of 1-5% cash back. So, if you’re not able to pay your debt in full each month, you’ll get a minimum of 1% cash back but will pay an average of over 20% in interest.
Yet, when used intentionally, credit cards with reward points can offer many benefits. If you like the idea of earning reward points but don’t want to go into debt, here’s what you can do.
5 Tips on using a credit card wisely
We know that credit cards have advantages and disadvantages.
Years ago, when I was in between jobs without an emergency fund, having a credit card helped me with my basic needs, such as buying gas and groceries.
I was later able to pay it off when I got back on my feet and establish my emergency fund. Have a credit card was helpful but it cost me in interest. And so while credit cards are a big part of life, debt doesn’t have to be.
Here’s how to use your credit card while also sticking to your financial goals.
1. Pick a credit card with benefits that meet your lifestyle needs
If you need to have a credit card, it’s important to find the right card for you. After all credit cards are not bad. They are simply a tool and they come with their own set of benefits if used responsibly.
Credit card reward programs all seem attractive, but you should choose the one that’s right for your life.
You may be offered a travel rewards card but rarely travel. In that case a cash-back rewards card might be a better option. If you want to travel in the future, you can put your cash back rewards toward to buy a plane ticket.
2. Charge wisely
One of the best ways to use a credit card responsibly is to avoid overspending. If you’re relying too much on your credit card, try switching it out for a debit card.
Here are some additional tips to help you get your swiping under control.
Put a lock on your credit card (You can do this in your online account)
Identify your spending triggers and address them
Be intentional with your shopping by making lists
Budget for your credit card spending
All in all, using a credit card isn’t like using a magic wand, even though it feels that way. Yes, you’re getting what you want now, but you’ll end up paying for it in the future.
3. Pay your balance in full each month
The easiest way to ensure that you can pay your credit in full each month is to set aside the correct amount of cash before you start swiping. The swipe first, think about it later method will dig you deep into debt.
A budget is a great tool to help you set up spending limits based on your cash flow.
Another handy trick, especially if you can’t pay your bill in full, is spending under 30% of your credit limit. Why 30%? It’s called the credit utilization ratio, and keeping your spending within that margin will help preserve your credit score.
4. Don’t skip payments
If you’re already working on paying down your credit card debt, it may seem harmless to skip a payment. However, this will only delay you paying off your amount and cause friction between you and your credit card company. It can also negatively impact your credit score.
Instead, communicate with your credit card company as soon as possible if you are unable to make your payment. They may be able to offer you payment plan or deferral without making a negative remark on your credit report.
Additionally, put your credit card away for a while until you get that balance under control. No more spending.
Another hack you can try is moving your high debt to a 0% interest card. With no interest, you can pay off the debt faster. Before you do this, make sure you do your research and are aware of any introductory interest rate expiration dates, and consolidation fees. This approach can be more costly in the long run if you have not done your research.
5. Don’t have too many credit cards
This is a trap I’ve fallen into. I remember a period of time when it felt like I was getting new credit card offers every month, with each letter promising better benefits than the last.
Yet the truth is, you don’t need a lot of credit cards. In fact, having too many lines of credit open can negatively affect your credit score because you’ll look more risky to lenders.
So keep it simple and build good spending habits with one card. Then, you can add an additional card when you feel ready. Remember to consider what you need your credit cards for.
If debt management is something you’re working on, make sure to check out our free courses on destroying your debt.
🥰 Team CGF’s Amazon Favs
Need a little more help tackling credit card debt and managing your finances? We’ve got you covered with some of our Amazon favs!
Debt Payoff Planner
Making a plan to pay off your debt will help you manage your money better, relieve stress, and have a brighter future. Creating a plan is simple with the 110-page debt planner. Keep track of your expenses and bills all in one place.
Money Games - Debt Freedom: The Fun Way to Get Out of Debt and Reach Your Money Goals
You might have tried planning, budgeting, and cutting expenses to pay off debt, but have you tried a money game?
One of the hardest things about paying off debt is that it isn’t fun, and it’s easy to lose motivation. Budgeting and other finance methods can be particularly hard for people who are more visual learners.
Fortunately, the Money Games book of charts is designed specifically for you. This innovative tool will transform your financial approach, injecting fun into the experience and helping you reach your money goals.
The Spender's Guide to Debt-Free Living: How a Spending Fast Helped Me Get from Broke to Badass in Record Time
Like most people who love spending, author Anna Newell Jones ended up drowning in $24,000 of debt. Determined to take control of her financial situation, she embarked on a spending fast and documented her journey on her blog, AndThenWeSaved.com. Remarkably, Anna managed to pay off all her debt in just 15 months.
Anna's story inspired others, leading her to write "The Spender’s Guide To Debt-Free Living," which outlines a detailed plan for readers to follow. This includes creating a personalized Debt-Free Life Pledge, understanding spending habits, finding additional sources of income, and transitioning back to responsible spending habits after becoming debt-free.