Credit Cards : Risk vs. Reward
Posted by Tony Edward on Thursday, January 27, 2011

Credit Card Reward programs can be very appealing with airline miles, shopping points, and cash back offers. But with steep annual fees and high interest rates they usually come with strings attached. These programs have been around for decades and started with frequent flyer points for airlines. Then the credit card companies opened the rewards up for hotels, cash rebates, and today you can use your points for almost everything, like shopping on Amazon.com. Now this may sound like a great idea and worth while, but there is no free lunch.
There was a recent study that was done by the Federal Reserve Bank in Chicago which showed that people who use reward cards spent more money. For example, people go out to dinner and they have a meal together, then one person suggests that the others give them the cash and they will put the bill on their card to get the points. We've all experienced this, but then that person does not payoff their bill and they end up having 20 to 25 to 30% financing. And that's what the credit card companies want, they want you to start using credit cards again and they are sending out offers right now offering all sorts of programs.
Offers are coming out saying if you spend $4000 over the next 6 months you will get 50,000 points. This sounds amazing, that's a free plane ticket, but if you've paid your credit card debt down, you're finally free of credit card debt, it's that hey we have a special reward for you that you should be careful off. Some basic credit cards just come with reward programs so you should be smart in choosing a card and when signing up for a reward program.
When you're eyeing an offer look at the cost of the card, and most importantly look for the the catch you clauses. Read the fine print because many credit card reward points expire, look at what are you paying for those points, also is there a time period you have to use the card, if you're late you may lose those points. The credit card companies have this system down to a science. They can afford to give you points and cash back offers because they know you will make mistakes and will have a late fee, annual fee, and over the limit fee. They are not worried about giving these offers because they know they will come out ahead. Americans last year paid off over $200 million in credit card debt, so we don't want to get wrapped back up in debt because of some reward program.