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The Pros and Cons of Reward Credit Cards

September 2008
The Pros and Cons of Reward Credit Cards

By Rajesh Jyotishi

I have a group of friends who take many of their vacations each year from the points they accumulate thru their credit cards throughout the year. Recently, I met a good friend who actually took a trip around the world, all on Business Class, from the points he had accumulated thru his frequent flyer miles. It sounds great, doesn’t it?! So how do they do this?

What Are Reward Credit Cards?

There are several kinds of reward cards. Some credit card companies offer cash back on your purchases. Other cards from specific vendors offer the ability to pay at a later time: if you open up the Sunday newspaper, you’ll find many stores offering you zero percent interest offers and no payment offers from 6 months to as much as 2 years. These are also a form of a reward credit card. Then finally, there are the reward credit cards affiliated with vendors such as Delta, Marriot Hotels and many others, who reward users by letting them accumulate some sort of reward points, which in turn, can be cashed out in the form of various rewards such as airline fares, gift certificates to restaurants and hotels, as well as many other items.

Who Should Use These Cards?

As a general rule, these cards are better for people who are well disciplined in paying their bills on time, who do not accumulate and hold credit card balances. The reason is very simple. The interest rates charged by these card providers are very high and the penalties they charge for late payments may cost you more than the benefits themselves.

Don’t tell my wife, but I personally had an experience last month on my Marriott card. I was late in making the payment by a couple of days and got hit with a $65 late fee and interest charges. That’s almost like paying for a hotel room with late fees!

Recently, I read a report saying that a well-known electronics store showed that a third of their profits were from their credit cards. Now how is that possible when they are offering you a zero percent interest and payment programs? Read the fine print. Most of the time, if you are late even by one day from the payoff period, you could be hit with a high interest charge, as high at 24 percent, retroactive from the time you purchased your item. That is like paying 25 percent more for an item. In many cases, if you don’t make the minimum payments required, the default high interest rate takes effect immediately.

Reward cards are also great for people who travel a lot on business. Even if you work for a company, many companies allow their employees to charge their expenses to their personal cards and submit an expense report for reimbursement. Think about it: you can accumulate frequent flyer miles as well as hotel reward points throughout the year, and take your family on vacations with your reward points at a later time.

So, if you are disciplined with your finances and pay your bills on time, these cards can earn you some great rewards. Otherwise, you may be just ? fooling yourself.

Moneywise is hosted by Rajesh Jyotishi with Shalin Financial Services, Inc. Rajesh is a registered representative and an investment advisor representative of SII Investments, Inc., a Registered Broker Dealer and a member of FINRA/SIPC. Rajesh has been in the insurance and financial services field since 1991. For questions, he can be reached at 770-451-1932, ext. 101

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