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By Pam Leibfried
For most credit card users, the decision to apply for a rewards card should hinge on one question: Do you pay your credit card bill in full every month or do you carry a balance from month to month? If you pay in full, you’ll likely benefit from a rewards card.
Whether or not you carry a balance on your credit cards has to be heavily factored into the should-I-switch-to-a-rewards-card decision because rewards cards charge higher interest rates than non-rewards cards. In short, if you are considering applying for a rewards card that would earn a 1% reward on your purchases but would charge you an interest rate that is 5% higher than you’re now paying on your non-rewards card, you wouldn’t come out ahead with a rewards credit card. On the other hand, if you pay your credit card off every month, you’ll earn rewards for your spending without incurring any additional interest charges that might offset your reward earnings. In that situation, a rewards credit card would be a good deal.
However, there are two exceptions to the above rule of thumb. If they apply to you, you’ll have to get out your calculator to determine if switching to a rewards card makes sense.
If you choose a rewards card that has an annual fee, you may not earn enough rewards to offset that cost. Even if you pay your balance in full each month, unless you use your credit card a lot, the annual fee could cost you more than the rewards you earn. For example, if you earn a 1% reward but pay a $95 annual fee, you won’t break even until you’ve charged $9,500 unless there are other perks. In some cases, though, a card with an annual fee might make perfect sense because of non-earnings perks the card offers. For example, many airline credit cards offer free checked baggage, which at $25 per person each way could make the rewards card worth it even if the cashback or rewards points you earn don't exceed the cost of the annual fee.
Note: Our Alliant Cashback Visa Signature credit card has no annual fee, so you don’t even have to consider this factor if you choose our Visa Signature card.
If you pay your credit cards off in full almost every month, you’ll need to do some calculations to see if you’re an exception to the only-if-you-don’t-carry-a-balance rule. For example, I have a friend who pays her balance in full 11 months of the year. But pretty much every year, she has to pay her December bill off over two months because of her family’s Christmas expenses. In her case, even though the interest rate is higher on a rewards card, the total interest that she pays in a year is pretty small because she only pays interest occasionally. She might still come out ahead using a rewards card – especially if it’s a card with no annual fee.
If a rewards credit cards is right for you, you’ll find that it’s a great way to get perks or cash back just by doing what you were going to do anyway – spend money! Happy shopping.
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