Yahoo Finance 3 Signs Your Rewards Credit Card Is a Waste of Money
Rewards credit cards have fast become a popular form of plastic, making up nearly 80 percent of new card accounts in the first quarter of 2014, according to the American Bankers Association. However, your favorite card may be costing you more than it's worth, according to an August survey by NerdWallet. Here are three signs that your rewards credit card is unrewarding.
1. You don't spend enough to cover the annual fee.
About half of consumers don't want to pay credit card annual fees, but the NerdWallet survey of over 2,000 adults found 31 percent of consumers who own rewards credit cards don't even know what they cost.
As of June, the average annual fee for a rewards credit card was $58, and the average rewards point was worth 1.14 cents. You'd have to spend $5,088 annually -- more than $400 a month -- to offset the fee before your rewards truly become your own. You'd also have to account for opportunity cost of the rewards you could have been racking up on a card without an annual fee .
On the flip side, cards with annual fees often come with higher rewards and better perks, such as travel credits, upgraded purchase protection benefits and supersized sign-up bonuses. Whether you opt for a card with an annual fee should depend on your personal spending habits and how you'd use the card's benefits.
Take back your money: If you don't spend enough on your credit card to pay for the annual fee, you're better off applying for a no annual fee card. This doesn't mean your new card will have paltry rewards. Many no annual fee cards offer cash back or travel rewards equal to 1 percent to 2 percent on each purchase.
When evaluating no annual fee cards, pay attention to the perks -- or lack thereof. A few popular benefits that you may find with no-fee cards include protection benefits on purchases, rewards redemption options and no foreign transaction fees.
2. You don't redeem rewards.
Rewards are clearly important to consumers -- over half of those who switched credit cards in 2015 chose their new card based on a better rewards program, according to J.D. Power's U.S. Credit Card Satisfaction Study. But some cardholders aren't using these rewards.
The NerdWallet survey found nearly 1 in 5 consumers with rewards credit cards didn't redeem any of their rewards points last year. While there are legitimate reasons to hang on to travel rewards, such as reaching elite status or saving up for a big trip, not redeeming rewards also comes with risks.
One major risk is devaluation. Mile devaluation has become common in airline frequent flier programs. If your favorite rewards card racks up miles and you aren't using them, the value of your miles may decrease before you get around to booking your trip. This means it will take more miles, and therefore, more time, to earn a free flight.
Another risk is expiration. Nothing lasts forever, and that includes most credit card rewards. With a few exceptions, rewards expire after a certain period of time, which just wastes cash back, miles or points.
Take back your money: If you haven't evaluated your rewards for a while, take a look at what you've earned. Redeem any cash back and decide how you want to use points or miles, now or in the future. Don't let your rewards go to waste -- they're one of the best features of credit cards.
3. You're spending on multiple cards.
If it takes $5,088 to break even on one typical rewards credit card with an annual fee; it takes double or triple that to break even on multiple rewards cards. The average consumer has two rewards credit cards, according to the Federal Reserve Bank of Boston. Assuming they all have annual fees, you'd have to spend more than $10,000 a year just to break even. Only then would you begin racking up rewards on your purchases.
Take back your money: Multiple cards can come in handy, especially if they offer different benefits. But if you don't spend a lot each year, several cards with annual fees will cost you more than they're worth. Limit yourself to one or two rewards cards with an annual fee. For additional cards, opt for no annual fee cards with high rewards rates.
The Bottom Line
A good rewards credit card should earn money, not cost you. To ensure that you're taking full advantage of your favorite cards, make sure you spend enough to offset the annual fee, redeem your rewards regularly and limit the number of cards with annual fees.
Erin El Issa is a former accountant and a staff writer for NerdWallet. She covers credit reporting and scoring, credit cards, consumer debt and other personal finance topics.
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