5 Myths About Credit Card Rewards
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When I first started writing about credit cards in 2007, I was surprised by the demand for information about this subject. Credit cards are incredibly popular, yet there are relatively few unbiased voices out there compared to the banks' constant siege of marketing propaganda. In the absence of credible sources, an entire mythology has been constructed around credit cards that bears little relation to the truth. And it doesn’t help that many of these beliefs concern the credit scores and the secret formulas used to come up with them. (See also: 6 Ways My Family Scores Free Travel With Credit Cards)
So let’s deconstruct these myths a little and shine some light on how your credit cards and credit scores actually work. Here are five common myths about credit card rewards.
1. “Applying for a Credit Card Will Hurt My Credit Score.”
Since so many people get into trouble with credit cards, many believe that applying for a new card will hurt their credit score. While it is true that credit scores take into account your number of recent applications for credit, applying for a single credit card will not hurt your credit score. In fact, it will probably help your score. Although the exact formula that the Fair Isaac Corporation (FICO) uses to create credit scores is a secret, they do disclose what factors they use.
"New credit," a factor that includes the number of recent inquiries does compose 10% of your credit score. Yet even this relatively minor factor is not affected by a single application for new credit. Apply for several new credit cards in a short period of time, and you may see only a small (and temporary) decline due to this factor.
At the same time, being granted new credit affects other factors that will help your score. By being extended new credit, you will decrease your debt-to-credit ratio (also known as "debt utlization" or "debt-to-limit ratio"). This is part of the “amounts owed” factor that makes up 30% of your credit score.
So if you find a credit card that is worth applying for, don’t let this unfounded myth stop you.
2. “Canceling Credit Cards Will Help My Score.”
If people mistakenly believe that applying for a credit card is bad for your score, it follows that cancelling your credit cards must improve your score. Actually, it will usually hurt it.
Cancelling credit cards will reduce the total amount of credit you have been extended and increase your debt-to-credit ratio. Cancelling credit cards that you have held for some time will also reduce your average length of credit history.
So as long as you are not paying an unreasonable annual fee, it is best to keep your existing cards on your credit report.
3. “Earning Points and Miles Is Not Worth It.”
Everyone who has collected points and miles has found out the hard way that rewards can be over-promised and under-delivered. In response, many have concluded that all these points and miles are just a scam.
It is true that airlines have limited availability of awards seats at the lowest mileage levels and hotels are great at hiding blackout dates and capacity restrictions in the fine print of their program terms. Yet the value is still there for those who are willing to look hard enough for it.
I can still find business class international award seats if I am flexible and search far in advance. In addition, domestic award seats for last minute flights can be a great value when compared to full-fare, walk-up prices.
I also try extra hard to find eligible partner award flights that may not be included in online search results. Most airlines allow you to redeem their miles for flights on a dozen or more of their partners, yet few do a good job of displaying these partner's results when you search for award seats online. Often you have to search the partner's own website and then call the airline to have the award booked over the phone.
Finally, there are still several programs that offer awards with no blackout dates or capacity controls such as Starwood Hotels and Southwest Airlines.
4. “You Can’t Just Apply for a Credit Card to Get the Sign-Up Bonus.”
Many people have trouble accepting that banks will offer you something for nothing. But when you apply for a new credit card and accept a sign-up bonus, you are giving the bank an opportunity to earn your business. You are under no moral or legal obligation to renew the card at the end of the year. If you compare the terms and conditions of these cards, you will conclude that the banks understand this and choose whether or not to include incentives for your use and renewal of their card.
For example, many cards require that new applicants spend a minimum amount before receiving some or all of the promised bonus. Other cards grant bonuses not just when a card is received, but only upon renewal. The fact is that credit card customers are so profitable for banks, that they are willing offer up plenty of free bait in order to reel in a catch of new customers.
5. “I Can Carry a Balance and Still Earn Rewards.”
This may be the most dangerous myth of all. Credit card rewards are great, but they should only be earned by those who always pay their balances in full and on time every month.
If you carry a balance and think that you are earning rewards, you are forgetting three things:
First, you are not getting the lowest interest rate you can, as reward cards will always have a higher interest rate than comparable non-reward cards.
Second, the value of the interest paid will be far greater than the rewards that you receive.
Finally, earning a reward for spending is the last thing that you should be thinking about when you have credit card debt. If you are carrying credit card debt, you should always find the card with the lowest interest and be working to pay off your debt as soon as possible.
Make Credit Cards Work for You
Credit cards are powerful and complex financial tools, and you shouldn’t rely on popular myths when you make decisions about their use. By understanding how these myths are wrong, and using trusted sources to learn the facts, only then can you make your credit cards work for you.
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Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.
I know many will disagree but I still believe that cash back rewards cards are the best bang for the buck. Yes, you can sometimes get more points and miles or whatever the reward translates to, but what if things change and you no longer fly as much as you used to by the time you get a bunch of miles accumulated? Or your favorite retailer doesn't match up the points that they once did when you signed up? Cash always spends, and it also gives you the flexibility to spend it where you might need it, especially knowing that your needs and wants will change over time.
I'm with Michael on this one. We go cash back rewards cards since much our travel ends up being either paid for by an employer or on low cost carriers. We think the cash is a much better deal - heck we made almost $1100 this year which we're cashing in for holiday spending money. http://www.plantingourpennies.com/2012/10/08/rewards-cards-and-holiday-m...
I didn't know that people actually thought canceling a credit card could help their credit score. That really doesn't make any sense. Signing up for a credit card simply for the signing bonus seems a littler desperate, and someone who would do that probably isn't very good with their finances and may run the risk of spending money they don't have on the temptation of having that new card.
Great article, but the subtext of any credit card rewards program is to encourage habitual use (and tempt users with improper/irresponsible use of credit). After all, these companies make more money when consumers can't pay their balances in full each month. If you can enjoy all the rewards and not fall victim to vices, all the better!
There are a handful of rewards cards that partner up with other businesses so that you can better take advantage of the points you earn. But you still have to do the research as many don't transfer 1:1. There are some good options where you can transfer your miles into hotel stays or vice versa. You just have to keep your eyes open for the deals.
You need to be strategic and think about your travel goals. Opening a few travel rewards credit cards has enabled us to plan regular cross-country visits to see family. It's true that the low-cost award seats are hard to come by, but since we got the miles for free in the first place, we don't mind spending 50K miles for a round-trip domestic ticket.