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Have you recently received a promotional mailing from one of those credit cards offering great rewards? Whether you are diving into the world of credit cards for the first time or thinking about adding another card, a rewards card can be very tempting. According to a study published on Credio.com, nearly half of respondents said they are attracted to a credit card because of the benefits and rewards.
You can almost see yourself on the beach in Florida or as a passenger in a vintage World War II fighter jet, thanks to the points you'll accumulate. Or maybe you're thinking about that new laptop you could buy with the cash back you earn.
Maybe you should say no
There are two problems with rewards credit cards. First, they are designed to put you in debt. Credit card issuers do not offer rewards out of the goodness of their hearts. The purpose of these cards is to incentivize you to spend more and more, chasing your rewards. But when you do the math, you'll see that those rewards aren't so good. Here's an example. The Chase Freedom card currently offers 5X cash back when you use it at certain merchants, including Amazon. Wow, that sounds great! Just do most of your holiday shopping through Amazon and you'll get a great deal on cash back.
Not so much
While 5 times the cash back may seem like a lot, it's really only five points (cents) for every $ 100 you spend. So, to earn $ 100 in cash back or reward points, you would have to spend $ 2000 with the right merchants. If you are earning only double cash back, the numbers get even worse, as you would have to spend $ 5000 to earn that $ 100!
The Second Problem
If you pay the credit card balance of rewards every month, there is no second problem. However, if you transfer a balance, then there is one: the interest rate you will be charged. Many of the rewards cards will show you their interest rates as varying from 12.99 % to 22.99 %. But don't be fooled. You would need to have a very high credit score to get that 12.99%. You'll most likely end up paying around 15 % or 16 %.
Now, do the math again. Even with a 5X repayment, you may earn 5 %, but if you carry a balance forward, you may pay 15 % in interest, which will more than offset the 5 % you earned on the card.
Why a regular credit card?
There are several reasons why you might forgo the rewards card and get a simple credit card. For one thing, these cards come with a number of extras that can make them a great value. Think about credit card fees. As an example of this, the Citi Simplicity Card has no annual fee, no late fee (ever), no penalty fee and offers 0% interest on purchases for the first 21 months. This makes it a good choice if you need a lot of time to pay off your initial purchases or tend to make late payments occasionally.
The Capital One Platinum credit card could also be a good option, as it will give you a higher credit line if you make your first five monthly payments on time. In addition, it offers fraud coverage in case the card is lost or stolen, as well as online banking, which would allow you to access your account even from your smartphone. You can also make your payments with this card online, by check or at a local branch at no charge, and in fact, you can choose the monthly due date that best suits your situation.
With the easy-to-use Chase Slate credit card, you get your FICO credit score (free) and a Credit Dashboard that will show you the reasons behind your score, a summary of your credit report information, and information that could help you better manage your credit. Plus, it offers an introductory APR of 0% for the first 15 months and no annual fee.
Best Credit Card Interest Rates
Simple or straightforward credit cards generally have better interest rates than rewards cards. As you just read, the Citi Simplicity card has an interest rate of 0% for the first 21 months. And the First Visa Platinum credit card from Simmons Bank has an APR of 7.25%. Yes, you read that right: 7.25 %.
This card comes with travel accident insurance with $ 1,000,000 coverage, a rental car loss/damage waiver and credit card replacement and emergency cash. The aforementioned Citi Simplicity Card has three interest rates: 12.99%, 17.99% or 21.99%. Of course, the interest rate you will be assigned will depend on your creditworthiness. This means that if you have excellent credit, you should be able to qualify for the 12.99%. On the other hand, if your credit is less than stellar, the APR can go up quickly.
They can be easier to understand.
If you've ever tried to work your way through the details of a credit card rewards program, you know how difficult this can be. You may have to go to three or more different pages just to get all the information you need, and you're likely to