Marketing venues are replete with ads touting the benefits of credit card reward programs. Smiling, beautiful people encourage you to sign up today and use reward points to visit distant lands, relax at ritzy hotels, or replenish your bank account. You can use reward points to purchase luxury items at a discount, buy cheaper gas, even enjoy exclusive privileges at fancy airport lounges.

But remember that American Express, Discover, Capital One, and other reward card issuers make billions of dollars on these cards. They've done their homework. The benefits these companies dole out are more than offset by the revenues they take in. One survey found that over 40% of reward cardholders don't bother to use their rewards. Another study discovered that consumers increased their spending by over $60 a month and their credit card debt by $115 a month when using these cards.

So, as with other financial matters, it pays to do your research and know your propensities. If you're planning to apply for a reward card, be aware of these provisions.

  • Annual fees. If your card's annual fee is $50 a year and you get 1% back on purchases, you'll need to charge $5,000 a year (over $400 a month) just to break even.
  • High variable interest rates. A credit card company may offer a low "teaser" rate to entice you, but if you miss a payment or extend your balance beyond the introductory period, the rate may rise dramatically.
  • Narrow categories. Some cards only let you earn reward points in certain categories — such as groceries or gasoline — or at certain stores. In some cases, points earned with frequent flyer programs "black out" holidays or other dates you're likely to travel.
  • Expiration dates. Some issuers stipulate that you must spend at certain levels or use your reward card with a certain frequency; otherwise reward points expire.

To benefit from rewards programs, you need to keep good records. If you're the kind of person who loves to pay on time and finds pleasure in a balanced checkbook, a reward card may indeed provide substantial benefits. But if you tend to carry a credit card balance each month and struggle to control impulse buying, the same card may plunge you into deeper debt. As always, it pays to honestly assess your habits where finances are concerned. It also pays to read the fine print.

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