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  • 4m.

    The Limits Of Credit Card Rewards Programs

    Be sure to check a credit card's APR and fees before signing up. Depending on these costs, any rewards you receive could end up costing you more than they're worth.
    Updated: January 21, 2016

    What You'll Learn

    • Why you need to look out for the "introductory" APR on a rewards card.
    • How to calculate how much the APR will cost you.
    • Regular "rewards," like extended warranties, may be more valuable to you in the long run.
    A credit card caught on a hook

    To incentivize customers to sign up for their products, credit card companies often extend bonus rewards and services to the cardholder. These may be as basic as a frequent flyer program that earns the cardholder airline miles for every dollar they spend, or as comprehensive as a personal concierge service to assist the cardholder at any time of day.

    As a newcomer to the world of credit cards, you may be tempted to sign up for one of these programs (who wouldn't want an on-call money-butler?), but in most cases, they come with a catch: you have to be willing to spend big. So before you get caught up thinking about how you could use your airline miles to take a trip to Aruba, consider the actual worth of signing a contract for a rewards credit card.

    Those Three Little Letters

    Among many financial acronyms, "APR" stands out as one to definitely know. It stands for annual percentage rate, and it's how banks calculate the interest you'll be charged on the purchases you make on your card each month. You may have seen APR inconspicuously tucked away in credit card advertisements and in those mail offers you get bombarded with on a daily basis.

    Sometimes, credit card companies will attempt to entice new members by offering a special, introductory APR that is much lower than the usual rate but only lasts for a few months. It goes without saying, but it's important to read the fine print. Even if your APR is listed as "fixed," the company still has the power to change it—all "fixed" means is that they're required to give you a heads up before doing so.

    So what is a "good" APR, and how do you figure out how much interest it will result in? Well, because the credit card billing cycle spans 1 month, and not a full year, you need to divide a card's APR by 12 to gauge the interest charges you might incur. For example, if a credit card's APR is 24%, then the monthly interest rate is 2%. That means that if you carried over a balance of $100, you would be faced with an extra $2 in interest charges. Of course, none of this is your concern if you're able to pay off your balance before the due date—then you won't have to pay any interest charges at all.

    But the credit card companies are willing to bet this won't happen. At least, not every month. That's why APR tends to be lower for those with a solid credit history—and higher for those with a spotty credit score, including consumers who may not have a credit history at all, like students. Credit card companies believe that you'll be less likely to pay your bill on time, which means more money for them.

    Is It Worth The Fees?

    The costs involved with using a credit card also come from fees. As a result of tightened regulation and consumer backlash, annual fees are gradually becoming a thing of the past. However, you'll still find them attached to a lot of credit cards that offer rewards programs.

    As the name suggests, an annual fee is a yearly cost charged by credit card companies for the convenience of using their card. They tend to fluctuate in price, depending on the benefits of the card, but can often be high enough to negate the benefits of the rewards—and even a low APR.

    Let's say you sign up for a credit card that has a cash back rewards program that offers you 1% back for every dollar you spend. Sounds like an OK deal, right? Well, not if your card has an annual fee to go along with it. Even a $50 price tag would mean that you would have to make $5,000 in purchases every year just to get your money back. And it doesn't end there. Credit cards can also come with late payment fees, over-limit fees, and account maintenance fees, just to name a few.

    Before You Sign The Dotted Line

    Generally speaking, if a deal sounds too good to be true, it probably is. But that doesn't mean that all credit card rewards programs are a waste of time. In fact, the built-in features that come with most basic credit cards—like extended warranty on purchases and travel insurance—can actually be really useful. You just need to make sure you can afford them. As with any decision that affects your finances, it's important to do your research before applying for a credit card.

    Building good credit is essential for life's major financial transactions, like taking out a loan, submitting a rental application, or signing for an insurance policy. But the wrong credit card could cause you to spiral into debt or, at the very least, get lumped with so many fees and surcharges that you lose the worth of the card altogether. That's why it is vital to weigh up the costs of a credit card, and its rewards program, before you proceed with any application.

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