The High Cost of Interest
The single biggest trap in the rewards game is the interest rate. Rewards credit cards often come with higher Annual Percentage Rates (APRs) than their no-frills counterparts. If you carry a balance from one month to the next, the interest charges can
quickly erase, and then exceed, the value of any rewards you've earned. For example, earning 2% cashback on your spending is a losing proposition if you're paying 20% or more in interest on a lingering balance. A recent survey found that a majority of adults with credit card debt say they chase rewards even while carrying a balance month-to-month. The cardinal rule of rewards is to always pay your balance in full. If you can't, you’re better off with a low-interest card, as the savings on interest will almost certainly be more valuable than any points or miles.
When Annual Fees Don't Add Up
Many of the most attractive rewards cards, particularly those offering premium travel perks, come with hefty annual fees that can range from under a hundred to several hundred dollars. These fees are only justifiable if the value of the rewards and benefits you actually use exceeds the cost. It's easy to be enticed by a long list of perks like airport lounge access or travel credits, but you must be realistic about how often you'll use them. To see if a fee is worth it, calculate your expected rewards based on your typical spending habits and subtract the annual fee. If the result is negative, or less than what you could earn with a no-fee card, then the premium card is costing you money. Don't feel pressured to get a high-fee card if its benefits don't align with your lifestyle.
The Pressure to Overspend
Credit card companies are experts in human psychology. They structure rewards to encourage spending. Generous sign-up bonuses, for instance, often require you to spend a certain amount of money within the first few months. This can create a powerful incentive to spend more than you normally would just to hit the target and secure the bonus points. This behaviour, known as 'manufactured spending', can lead you to buy things you don't need, pushing you into debt. Some analyses suggest that people using rewards cards tend to overspend by a significant margin, believing the points they earn justify the expense. This illusion of 'earning' something can mask the real cost of your purchases, turning a perceived benefit into a net financial loss.
The Problem of Devaluing Rewards
The points and miles you accumulate don't have a fixed value; think of them as a currency that can be devalued. Airlines and hotels can change their loyalty programs at any time, requiring more points for the same flight or hotel stay. This means that hoarding points can be a risky strategy, as their purchasing power could decrease over time. Furthermore, points can expire if your account is inactive or if you close or downgrade a card without transferring them first. The complexity of different rewards ecosystems, with varying point values and transfer partners, also adds a hidden 'time cost' as you work to manage and maximise your earnings.
The Hidden Costs for Everyone
Even if you play the game perfectly by paying your balance in full and maximising rewards, the system has broader economic costs. Every time you use a credit card, merchants pay an interchange or 'swipe' fee to the card networks. These fees are higher for premium rewards cards. To cover these costs, businesses often build them into their overall pricing. This means that all customers, including those who pay with cash or debit cards, are effectively subsidising the rewards enjoyed by credit card users. This system can create a wealth transfer from lower-income consumers, who are more likely to use cash, to higher-income consumers who benefit most from premium rewards.
