Almost everyone wishes they could get something for free, but few people know that the pursuit of “free stuff” is commonplace among those who take advantage of credit card rewards.
The problem is, it can be difficult to differentiate between fantasy and reality, since almost everything you hear on the topic comes from those who benefit if you sign up – banks and travel bloggers.
Credit Card Rewards: Fact vs. Fiction
Before you start pursuing points, miles, or cash back, it make sense to dig a little deeper — to spend some time exploring the pros and cons of these rewards and how they work in real life. This post aims to debunk some of the most common credit card myths, while also arming you with information on how you benefit from rewards.
Myth No. 1: Credit Card Rewards are Easy to Redeem
Credit card salesman are happy to tell you how they scored flights from London to Tokyo with airline miles and only a hundred bucks in taxes and fees. But what they won’t tell you is just how complicated their redemption may have been.
Airline miles can be difficult to redeem at times, and that is especially true if you have specific dates or destinations in mind. To get the best redemptions, you have to be flexible, and even willing to endure multiple layovers or less-than-optimal flight times.
Simply put, signing up for an awesome airline rewards card and earning the sign-up bonus are only half the battle – you still have to find availability. And sometimes finding a way to use your miles is the hardest part of the entire process.
Even easy-to-use hotel points can be difficult to redeem at certain times of the year. Although many hotel loyalty programs don’t have blackout dates, most have capacity controls and thus only allow so many rewards to be redeemed at a given time.
The bottom line: Earning the points is a piece of cake, but redeeming them can be a challenge.
Myth No. 2: Pursuing Rewards Will Ruin Your Credit
One of the most common myths surrounding rewards cards is that having too many cards will ruin your credit. Although it’s easy to see why so many people have this concern, the fact is, applying for a new card occasionally will not hurt your credit in the long run.
According to myFICO.com, your FICO score is determined by your payment history (35%), how much you owe (30%), length of your credit history (15%), new credit (10%), and your credit mix (10%).
As you can see, 65% of your credit score is based on your payment history and how much you owe in relation to your credit limits (your debt-to-limit ratio). Although “new credit” determines up to 10% of your score, having a few new credit applications each year won’t be enough to make a dent for long.
On the flip side, paying your bills late or carrying credit card debt can wreak havoc on your score, so beware. Also note that most experts suggest that you refrain from signing up for any new cards at least 18 months before buying a home or taking out any large loan.
Myth No. 3: You’re Actually Paying for Those Miles
A certain percentage of the population operates under the belief that nothing is ever free. However, that isn’t true.
Most people could score hundreds of dollars in rewards every year if they always paid their bills on time, never paid interest, and avoided credit card-related fees.
The problem comes when people don’t pay their bills in full and carry a balance. Obviously, paying interest on your purchases negates the value of whatever rewards you receive. Even worse, rewards cards often come with higher-than-average interest rates, which can make it much harder to climb out of debt after the fact.
The bottom line: Don’t pursue rewards if you’re in debt or afraid of the responsibility; paying interest is never rewarding.
Myth No. 4: Credit Card Rewards Make Travel Free
It’s easy to marvel at the idea of getting free flights or hotel stays, but that’s not the end of the story. It’s important to pay attention to the details.
For example, even when you redeem airline miles for airfare, you’ll be responsible for the government-mandated taxes and fees for your ticket. Depending on your itinerary, that could mean ponying up as little as $5.60 for a domestic flight or shelling out a few hundred dollars for an international one. Airline miles may make your flight free, but you can’t use them to pay for taxes or fuel surcharges.
Even when you do get something for “free,” it doesn’t mean you’re off the hook altogether. Depending on the hotel, you might need to pay for other perks like Internet service, parking, or resort fees. And no matter what, you’ll need to pay for transportation to and from your resort, in addition to forking over cash for food, drinks, and incidentals.
The bottom line: Credit card rewards can make some aspects of your trips free, but they can’t take care of everything.
Myth No. 5: They’re Not Worth the Effort
I struggle to see how credit card rewards aren’t worth the effort for the vast majority of people. Even a simple cash-back card can help you earn 1% to 2% with almost no effort on your part, and a card without an annual fee will charge you nothing for the privilege.
Families who take their point-earning schemes seriously can easily score thousands of dollars of cash back each year – money they can spend to pay down debt, finance a family vacation, or save for the future. And each year, people who pursue airline miles and hotel loyalty points are able to do things they would not have been able to afford otherwise — like traveling overseas, flying first class, or taking the family on an epic adventure.
It’s easy to look at the rules and restrictions that accompany some credit card rewards programs and think they are simply too much work. But with a little effort, you could easily use them to fund your dreams.
Make Credit Card Rewards Work for You
With so much misinformation out there, it’s easy to see why so many people are confused or put off by the idea of rewards cards. But look around, and you surely know someone who is using rewards and profiting handsomely. The key to credit card rewards success is knowing your limits, vowing to stay debt-free, and ignoring all the hype.
The rewards are out there for the taking — you just need to know what’s real and what isn’t.