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Almost every credit card offer, these days, comes with some kind of enticement. They might offer you a special rebate or frequent flyer miles or another type of reward merchandise. As tempting and promising as they might seem, though, you must know that they are not always worth it.
When you consider applying for a credit card, you probably look at the interest rate and the credit limit before you decide if it is a smart investment for you.
You probably also look at what other kinds of benefits or rewards the card might offer you in addition to the basic convenience of using plastic in place of cash. Rewards can be almost anything but the basic understanding is that they are benefits that exceed the simple purchasing power of credit.
Active Credit Card Rewards
Active credit card rewards are benefits you get when you use your card to purchase something. There are many types of active rewards and they include:
- Discounts on various merchandise
- Affiliate network purchase discounts
- Rental car insurance
- Travel medical insurance
- Consumer purchase protection
For example, when you purchase a rental car policy for your vacation, you might have the option of getting a free or discounted insurance policy that will cost much less than the available insurance policy that the rental car company might offer you. Similarly, when you make a flight reservation you may also enjoy various kinds of travel insurances that will help you if you need them.
Passive Credit Card Rewards
Passive credit card rewards are things you might enjoy as part of a rewards program that works with points that you have to earn. This includes things like:
- Frequent Flyer miles/travel reward points
- Cash rebates
- Bill credits
These benefits only become available as you continue to use your card over time. You cannot necessarily redeem them right away and you usually have a choice for how and when you can redeem them. Also, they might not all be available for every card at any given time.
Because there are so many kinds of credit card benefits, many consumers may feel tempted to hold onto their cards and keep them active just so they can enjoy their associated benefits. What is most unfortunate about this, however, is that if you do not look at the expectations or requirements for keeping that card open and compare these costs against the rewards you may end up paying more in the long run. There are many ways that cards can cost you money, and some of these methods are very sneaky:
- Introductory rates
- Annual fees
- Differing interest rates
- Service charges
The problem with rewards cards - rather, the problem that some people might encounter - is that they are very easy to abuse. While you might think, for example, that it is ok to use the card to purchase your gas at every fill-up, if you do not pay off the card at the end of the month - and thus keep your interest low and your fees absent - you might end up actually paying for the reward that you think you are getting.
Carrying a balance every month is not something that will necessarily threaten your financial integrity in a short period of time. Over the course of a year or two, though (which is how long it often takes to accrue enough "points" for a one-way ticket, for example), that small balance that you never payoff will grow through interest and even though you never charged a single penny towards your airfare, what you paid in interest will be approximately the same thing.
This is not the danger, however; the danger is that what you will end up paying in fees and interest will cost you more than what you reap in rewards points, rebates, etc.
Credit cards that offer you great rewards can be very good, but only if you know how to use them. Be sure to read over all the fine print and compare the fee and payment schedule against the earnings schedule in order to make the most informed decision regarding whether a card is right for you.