- Accruing rewards is a major perk of using credit cards.
- If you're not careful, going after those rewards could wreck your finances.
- Make sure you're not buying unnecessary things just to earn rewards.
It can be a dangerous path to go down.
One of the best things about using credit cards is getting rewarded for purchases you were already planning to make. Spend $100 a week at the grocery store as a matter of course? You may be eligible for extra cash back that puts a few dollars a week in your pocket.
But while credit card rewards are a nice perk, it's important to not chase them too aggressively. If you do, these unwanted consequences could ensue.
1. You could end up spending extra just to snag rewards
Credit card rewards can be very tempting because they can seem like free money. But while it's a great thing to collect rewards on your scheduled or routine purchases, one trap you might fall into is spending extra just to snag rewards.
Overspending could wreak havoc on your budget and leave you without enough money to spend on essential bills. And, it could make your savings goals harder to achieve.
Let's imagine you're trying to save money to buy a home. Spending an extra $200 here or $300 there could make it so you have to postpone that milestone for months -- or longer.
2. You could end up with a balance you can't pay off
Spending too much in the hopes of boosting your credit card rewards may not only prevent you from meeting goals -- it could actually drive you into credit card debt. And that's not a good thing, because credit cards are notorious for charging a lot of interest. In fact, credit card interest can be so astronomical that by the time you're done paying off a $300 balance, you end up spending $600 or more on the items you charged.
3. You could wind up hurting your credit score
Swiping a credit card and paying off your balance on time and in full every month shouldn't hurt your credit score. If anything, it should help your score. But if you chase credit card rewards repeatedly, you could wind up with a balance you can't pay in full. And that could actually bring your credit score down.
One factor that goes into calculating credit scores is credit utilization, or the amount of your available credit you're using at once. You should aim to use no more than 30% of your total available credit. If you rack up a $500 balance and you have a total spending limit of $10,000 across your various credit cards, it shouldn't do damage to your score. But a $5,000 balance might.
Be careful with credit card rewards
It absolutely pays to get a credit card that rewards you for the purchases you make. But to avoid negative consequences, ask yourself one simple question before swiping that card: Am I making a purchase just to accrue rewards?
If so, consider that a warning to put the item in question back on the shelf or, if you're shopping online, close your browser and move on. And if you find that you're consistently overspending in the hopes of getting rewards, it may be time to stop using credit cards until you can train your brain to think differently.
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