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1/16/09

The Truth About Rewards Credit Cards

Rewards programs are supplements to credit cards and should not be the primary reason as to why you get the card. The best reason to get a credit card is a low interest rate (and of course no annual fee, because there is absolutely no reason to have a credit card with an annual fee). Additionally, the credit card that you obtain should have a high credit limit.

Before you choose a rewards card, you should look carefully at rewards card advertising. Many advertisements state that you can get cash back from using your credit card. The problem with these advertisements is that they are a little misleading. Do not get me wrong, you absolutely will get cash back from one of these cards. However, the amount that you have to charge and pay off is vastly disproportionate to the amount of cash that you get back. For example, most cash back rewards cards offer you 1% cash back. This means that you will have to charge and pay off $10,000 in order to get only $100 back. That is not a typo, $10,000 to get $100. Is it really worth it to apply for a card that offers 1% cash back? Additionally, these cards usually have a higher interest rate than the non-rewards cards. Therefore, as you are paying higher interest, you are barley getting any money back.

Also, make sure that the rewards card you want actually offers rewards that you want. Almost all of the credit card companies that have a rewards program offer some kind of "shopping mall" in which you can redeem your rewards points. However, many times there are products and trips that you will not want. Therefore, even if you have all of these rewards points, you will not be interested in anything and thus, will never use the rewards points. Therefore, the reason that you obtained the card is no longer useful. Thus, you may have just obtained a card that you will never use. In the end, you will end up with a bunch of reward points that you will never use or, if you redeem your points, you will end up with a piece of merchandise that you do not want.

The point is, do not be awe struck by a credit card solely because it offers rewards. Get a credit card that has no annual fee, has a low, fixed interest rate, and has a high credit limit. If you find a couple of credit cards that meet these criteria, then you can choose based on rewards. However, you have to make sure that the rewards program is simply a collateral matter and not the primary reason that you choose a card.

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