3 Ways Pursuing Credit Card Rewards Could Backfire
It can be dangerous to descend.
- Earning rewards is a major benefit of using credit cards.
- If you’re not careful, chasing these rewards could ruin your finances.
- Make sure you don’t buy unnecessary things just to earn rewards.
One of the best things about using credit cards is getting rewarded for purchases you were already planning to make. Spending $100 a week on groceries as a matter of course? You might be eligible for extra cash back that puts a few dollars a week in your pocket.
But while credit card rewards are a nice perk, it’s important not to chase them too aggressively. If you do, these undesirable consequences could ensue.
Credit card rewards can be very tempting because they may seem like free money. But while it’s a good thing to collect rewards on your scheduled or routine purchases, one trap you could fall into is spending more just to snag rewards.
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Overspending could wreak havoc on your budget and leave you without enough money to pay essential bills. Plus, it could make your savings goals more difficult to achieve.
Let’s say you are trying to save money to buy a house. Spending an extra $200 here or $300 there could force you to postpone this step for months or even longer.
2. You might end up with a balance you can’t pay off
Overspending in hopes of increasing your credit card rewards can not only keep you from reaching your goals, it can also land you in debt. And that’s not a good thing, because credit cards are notorious for charging a lot of interest. In fact, credit card interest can be so astronomical that by the time you finish paying off a $300 balance, you end up spending $600 or more on the items you charged for.
3. You could end up hurting your credit score
Swiping a credit card and paying off your balance on time and in full every month shouldn’t hurt your credit score. If anything, this should help your score. But if you chase credit card rewards repeatedly, you might end up with a balance that you can’t pay in full. And it could actually lower your credit score.
One factor that goes into calculating credit scores is credit utilization, or how much of your available credit you are using at one time. You should aim to use no more than 30% of your total available credit. If you have a balance of $500 and have a total spending limit of $10,000 on your various credit cards, this shouldn’t hurt your score. But a balance of $5,000 might do it.
Be careful with credit card rewards
It definitely pays to get a credit card that rewards you for the purchases you make. But to avoid negative consequences, ask yourself one simple question before swiping that card: Am I making a purchase just to earn rewards?
If so, consider it a warning to restock the item in question or, if you’re shopping online, close your browser and move on. And if you find that you’re consistently overspending in the hopes of getting rewards, maybe it’s time to stop using credit cards until you can train your brain to think differently.
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