Hey everyone, thanks for joining me for this week’s Monday Money. I’m Josh, the guy behind this column, and today, I want to talk a bit about an email I received about rewards credit cards. The writer of the email seemed a bit angry that I promoted them as good things. Here is what the email said…
I’ve seen you around online, and I like most of your writing. There is one thing I’m not so happy about. When you talk about rewards credit cards, you always talk about how much of a great thing they are. Although, you touch on the dangers of excessive use, you don’t talk much about that part of it.
Another thing I don’t read much in your articles is how much money they cost consumers that don’t use them because the stores still pay for the rewards…”
The email went on to say more, but that was the gist of the argument. That being said, in every article I write about rewards credit cards, I do talk about the dangers of excessive use. And, to be quite honest, I just learned about the costs stores pay when a rewards credit card is swiped from comments here in the Monday Money column. However, since then, I’ve been making that clear as well. However, when I read between the lines on these types of emails, I come to the conclusion that rewards credit cards have a pretty bad rap for becoming a debt trap. Is that true, are they really a debt trap?
Let’s Look Into The Basis Of This Argument
Because rewards credit cards offer rewards for each purchase made, the idea is that they compel consumers to make more purchases than they generally would. This is for 2 reasons. Rewards programs tend to put a prize aspect on spending. If you spend this much, you get this prize. So, when consumers are close to earning that reward, which we’re considering a prize, the thought is that they spend more than they have to in order to reach that benchmark.
Another argument that those who think rewards credit cards are debt traps make is that rewards programs create a competitive nature around spending. Because rewards programs often revolve around rewards points, the idea is that people will look at them like a game. After all, the only time most people are worried about points is during a game. However, we all want to win every game we play, and we know that the more points we have, the better our chances are of winning. Therefore, in the rewards credit card game mindset, the idea is that consumers overspend to build their points up and feel like their winning the game.
Is There Any Validity To These Arguments?
Absolutely! Each one of these arguments can be held as truth when you look at the basics of psychology surrounding games and rewards programs. I am in no way trying to downplay the idea that many people overuse rewards credit cards for the purpose of earning this reward or reaching that reward points benchmark. The truth is, these kinds of things happen. But, does that make credit cards themselves the bad guy in the equation?
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In My Opinion, The Answer’s No!
Honestly, I believe that rewards credit cards are a great financial tool. They are used by millions of consumers worldwide, and in more than 90% of the cases of their use, these problems don’t exist. Why? Well, because they were not intended to create these problems.
When rewards credit cards were created, they were designed to provide the same financial benefits that any other credit card would provide. They provide safe purchasing, easy accounting, and the ability to pay debt off over time. However, because there is so much competition in the credit card industry, lenders had to come up with something that would make their credit cards more appealing than those offered by their competitors. So, they added in rewards programs.
Therefore, rewards programs weren’t designed to be debt traps, and in most cases, they aren’t. However, there are people with incredibly competitive personalities that do fall prey to debt as a result of the above mentioned arguments.
So Who’s Fault Is The Overwhelming Debt These Innocent Consumers Are Dealing With?
Well, I hate to be the cynical bearer of bad news, but the truth is, most consumers dealing with overwhelming credit card debt aren’t victims. The unfortunate reality is, they’ve done it to themselves. When the lender approved the consumer for the credit card, they didn’t say, “Here’s a never ending credit limit, go spend until your heart’s content, and we’ll worry about the debt later.” No, they gave clear terms and conditions and expected the consumer to use the credit card responsibly.
This Brings Me To My Final Point
Don’t use rewards credit cards unless you feel you are 100% financially responsible. Rewards credit cards and any other credit card for that matter all can be used improperly. If you don’t understand how credit cards work, or feel that you are not financially responsible enough to handle a credit card yet, you shouldn’t use one. The bottom line is, credit cards put thousands of dollars at your fingertips. It’s up to you to not go on a spending spree and be more responsible about that money.
Do you think credit cards are a debt trap?