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Research: Credit card rewards and what you should be careful of -

Credit card rewards could be very tempting and cardholders often lose sight of their credit history and budget, when they make purchases just to avail their credit card rewards. However, not all credit card rewards are beneficial. Moreover credit card rewards come with a lot of disclaimers that one needs to be aware of. There are many different terms and conditions that reduce the effectiveness of credit card rewards and sometimes end up making the cardholder overspend instead of saving anything. These are some of the things to keep in mind when dealing with credit card rewards.

Be cognizant of the cap when garnering loyalty points

Cardholders often swipe their card more than they need to do, in order to get loyalty points. These loyalty points can be redeemed in the form of discounts at retail stores and shopping malls. However, the fine print usually limits the number of loyalty points that cardholders can redeem in a month and also in a calendar year. The rest of the loyalty points usually get expired and hence are in vain. Cardholders therefore need to make sure that the points they are collecting can actually be put to use. Besides, not all of them can be redeemed for direct discounts. Some points can only be redeemed on specific purchases at certain merchant stores which may or may not be of use to you.

Don’t shop for the reward

Shopping for the reward always ends up making you overspend. The best reward on a credit card is that which will help you save on what you have to spend anyway. Rewards which make you spend more are seldom of any use as they are marketing strategies that will make you exceed your budget. Hence, never spend just to reach the milestone expense stipulated for qualifying for a discount. The same holds true in case of redeeming loyalty points which make you purchase something that you don’t really need.

Be aware of annual fees and other charges

Although credit card rewards offer you discounts, travel benefits and cash back, you must ensure that your annual fees is waived off at least for the first year. Without this you will end up paying back most of what you have saved throughout the year. A high annual fee along with other charges like cash advance fee, currency exchange fee and high penalties could negate the benefits of the credit card rewards.

Interest rates

The biggest trap associated with a credit card is the high interest rate. Although rewards allow you to save some money, you might end up with outstanding dues incurred due to additional expenses. The interest rate being high, you end up paying more interest than what you have saved through rewards. That is also the reason why low interest credit cards are the best cards for those with constantly existing outstanding balances as the interests they pay over and above their bills is quite low. With high interest everything you pay for with the card becomes 15 – 20% more expensive.