Why the Best Credit Card Rewards Strategy Is a Slow One

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For those who rush into the credit card rewards game, the consequences can be severe and long-lasting. After all, average credit card debt per indebted household stood at $9,100 in 2017. While some of that debt is probably the result of emergency spending, it's inevitable that some of it also comes from poor planning.

A former neighbor of mine recently told me how she racked up debt in pursuit of rewards. In the midst of a move across the country, she signed up for a travel credit card that would let her use miles for flights or transfer to airline partners. She was going to spend money on her move either way, so why not get something in return? She was going to pay off her balance right away — or so she thought. What could go wrong?

As life would have it, the mother of two faced higher moving expenses than anticipated. She also struggled to find a good job right away, which left her relying on credit to pay other bills. In the end, she wound up with a ton of debt and some negative marks on her credit report.

Now she's stuck trying to pay off credit card debt at a high APR until she can qualify for a balance transfer card with 0% APR for a limited time. It's easy to see what went wrong here; she used credit card rewards without a real plan in place — and without enough cash to cover her bills or an emergency.

The potential for debt is one of the major pitfalls of credit card rewards, but there are plenty of other reasons you should approach this strategy at a snail's pace. There's a lot that can go right if you win the game, sure, but there's even more that could go wrong. Here's why you should proceed with caution.

Credit cards may cause you to spend more

While many people who pursue credit card rewards say using credit doesn't change their spending habits, some academic research suggests that, at least for some of us, spending habits can change quite a bit.

One study published in the Journal of Experimental Psychology: Applied in 2008 noted that the immediacy of paying with cash affected people much differently than the delayed consequences of paying with credit. In an excerpt published in Psychology Today, the argument was that "the more transparent the payment outflow, the greater the aversion to spending or higher the 'pain of paying' … leading to less transparent payment modes such as credit cards and gift cards (vs. cash) being more easily spent or treated as play or 'monopoly money.'"

In other words, credit cards dull the pain of paying. They do this by delaying the timeline in which you have to pay your bill and by allowing you to mix your purchases in a way that causes you to forget exactly what you're buying.

If you sign up for a bunch of rewards cards without knowing whether you can use them like you would cash, you may find out the hard way that you're someone who overspends with credit. This can be a costly lesson, but you can minimize potential damage by taking your time with rewards cards and using them in moderation at first.

Juggling too many new cards can lead to reckless spending

One of the main drivers behind rewards card sign-ups is the initial bonuses they offer. Many cards offer hundreds of dollars in cash back or travel credit for spending a specific amount of money within a few months (e.g. $3,000 in three months). These bonuses can be lucrative, but they can also cause people to overspend to reach the required spending minimum.

Juggling too many new cards at once can also leave you in a position where you have to spend more to earn each of the bonuses you're after. If, for example, you signed up for three cards that required you to spend $3,000 in three months to earn the bonus, you'd be on the hook for $9,000 in spending at once. Could you pull it off without jeopardizing your financial health? Maybe, but maybe not.

You're better off pursuing only one bonus at a time and making sure you can reach any spending thresholds naturally with regular purchases like groceries, gas, insurance, and utilities. After all, buying stuff you don't need to earn a credit card sign-up bonus is unlikely to leave you in debt. (See also: 5-Minute Finance: Track Your Spending)

New credit cards can hurt your credit score

Another reason to approach credit card rewards carefully is the fact that getting too many credit cards at once can actually hurt your credit score. Keep in mind that "new credit" makes up 10% of your FICO score, and it's easy to see why. New credit cards may cause credit reporting agencies to believe you are a greater risk, and they may push your score down accordingly.

In addition to new credit, the length of your credit history also makes up 15% of your FICO score. Since getting new cards will cause the average length of your credit score to drop, this is another factor that can hurt your credit in the short-term. (See also: How to Rebuild Your Credit in 8 Simple Steps)

It takes time to build good credit habits

Finally, don't forget that it takes time to build positive financial habits — including the ability to use credit responsibly. If you jump into credit cards too soon, you might wind up in the middle of a problem you don't know how to fix.

The best way to use credit cards is in conjunction with a monthly budget. You can charge your purchases each month to earn rewards, but you should have the cash on-hand to pay your bills since the average credit card interest rate is over 16%.

It also helps to build an emergency fund you can use to cover unexpected expenses or fill the gaps if your earnings drop for any reason. If you use credit without a plan, you could live to regret it and wind up in debt for a long, long time.

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