Editorial Policy

6 ways rewards cards can backfire

Allie Johnson

August 25, 2015

Rewards cards are great for savvy spenders who pay off their balances in full each month, but can backfire big time for newbies, shopaholics and consumers with shaky finances.

“Some people are hypnotized by the whole rewards card thing,” says Wayne Sanford, a Texas-based credit expert and owner of credit consulting company New Start Financial. “But you really want to read the fine print and look for the gotchas.”

Here are six ways rewards cards can, at best, disappoint you and, at worst, leave you in worse financial shape — and how you can prevent each one from happening:

1. You pick the wrong rewards card. Many consumers just sign up for a rewards card without giving it much thought. “That's something that can really backfire on people,” says Tiffany Funk, a rewards expert at PointsPros.com, a service that helps consumers maximize their rewards points. For example, the Capital One Venture card might be fine for a family of four who wants to use points to fly to a family holiday celebration in Omaha, but all wrong for a couple dreaming of traveling in luxury to a beach vacation in Thailand. Sometimes Funk has to break the news to a cardholder planning, say, a wedding anniversary trip, that a million Capital One points won't get them the international business-class tickets they could get for a little over 100,000 points in another rewards program, such as American Express. “It's heart wrenching,” Funk says, adding that the cardholder often has spent years, tens of thousands of dollars and hefty annual fees, chasing these rewards. So, before you apply for a card, decide exactly what you want to get with your rewards, then do some research to pick the plastic that will best help you reach your goals, Funk says.

2. You get a card for the sign-up bonus, then blow your budget to make the minimum spend. Credit card companies dangle huge sign-on bonuses, some worth as much as $500 in travel, to get new customers. The catch is, you have to spend a certain amount in a certain time period – “minimum spend,” in credit card lingo – to actually get the bonus. For example, the American Express Starwood Preferred Guest card is offering 30,000 bonus points if you spend $3,000 on the card in the first three months after opening the account. This can be tricky, says certified financial planner Jason Hull, owner of Hull Financial Planning in Fort Worth, Texas. If you've got plenty of money in the bank, you can simply stock up on household supplies, prepay your cell phone bill and buy gas gift cards to use to fill up your tank in the future, Funk says. (Or, reams of toilet paper at Costco, Hull says.) But you don't want to overspend or charge up a balance you can't pay off in full. So, before you apply for a card to get a sign-up bonus, do some planning. One option is to sign up right before you're going to make a large, pre-planning purchase, such as plane tickets for a vacation, Hull says.

3. You carry a balance and get hit with interest. In general, the best rewards cards tend to have very high interest rates, often in the 18 to 20 percent range, Funk says. Carrying a balance over from month to month will almost surely negate any rewards you rack up, she says. For example, say that you spend $5,000 on your Capital One Venture card, earning 10,000 points, worth about $100 in travel. By carrying that balance for just a month at a 20 percent APR, you shell out over $80 in interest. Carry it for two months, and you've paid more in interest than you earned in rewards. If you don't always pay off your balances in full, avoid rewards cards, Hull says. If you carry a balance, it shows that you're still getting a grip on managing your expenses, Hull says. “So the last thing that you want to do is to give yourself a temptation to spend even more than you're spending now and dig yourself further into the hole.”

4. You get it and forget it. Rewards cards also usually have moderate to high annual fees, Funk points out. If you sign up for a card, stick it in your wallet and only use it a couple of times a year, the annual fee could put you in the hole, she says. To avoid this scenario, make sure you're using your card enough to come out ahead or look for a card with no annual fee, which might offer slightly less generous rewards. For example, the Capital One Venture One card has no annual fee and offers 1.25 miles per dollar spent. (Compare that with the Capital One Venture, which has a $59 annual fee after the first year, but gives you 2 miles per dollars spent.)

5. You make a late payment. Paying hefty late fees, especially if you do so regularly, also eats up rewards quickly. On the Chase Sapphire Preferred card, for example, late fees ring up at $35 a pop if your balance is $250 or higher. Make one late payment, and you've just canceled out the rewards from over $1,500 or more in spending. (The value of your points depends on how you redeem your rewards.) And some card issuers will freeze your rewards until you pay your bill. For example, if you've got a Citi ThankYou Rewards card, you won't be able to use your points if you're behind on a payment. After you pay up, you'll have to call or log into the Citi website to request that your points be reinstated. So, set up automatic payments from your bank account so you'll never be late, Hull recommends.

6. You spend more just to get more rewards. Might as well buy that designer handbag, techie gadget or trendy piece of exercise equipment because it's on sale and you get rewards, so that makes it a doubly good deal, right? It's not difficult for rewards cardholders to justify spending more in order to load up on miles or points, Hull says. To avoid this trap, try using your rewards card only for pre-allocated expenses, Hull recommends. For example, use it to pay your Netflix, electric bill and insurance every month, he says. (But make sure you won't get charged a “convenience fee” by the merchant for using your card. Hull doesn't use a card to pay property taxes because the county adds a 3 percent surcharge for credit cards.) So, only charge stuff you'd definitely buy anyway. “Just insert the rewards card between the expense and the payment and rack up the miles,” Hull says.