Do you save to spend or spend to save? If you belong to the second category, reward points can only harm your financial health.
Illustration: Dominic Xavier/Rediff.com
Get bonus points, cash back, miles and more. There I got your attention! How we love to redeem credit card rewards. Rewards are a good way to save some money while spending. However, the same rewards can prove expensive if we start spending to save. Spending to save? Yes, that indeed happens.
Rewards can be very tempting and can lure card holders to spend money which they otherwise wouldn't have. What happens then? You end up spending more money than what the reward is worth! Such spending decisions taken under the influence of a reward temptation can be a bad idea for your wallet.
Moreover there are chances that you were not required to make that purchase at all. You may have done it only for the reward. Expensive carrots indeed! Here are 7 situations when credit card rewards can backfire.
1. Here redeem your rewards, but first open your wallet!
Rewards points accumulated can be redeemed as per the card company's policies. This typically includes spending at specified outlets, brands, miles or cash back. Once you know that you have accumulated the reward points there is an urge to redeem and benefit from it. This urge pushes us to think of ways to redeem which includes going in for purchases which are not required!
Whether it's shopping for clothes, accessories, travel plans or dining out, decide to spend on these activities only if they were a part of your plan anyway. Planning to spend for redeeming rewards is not a good idea.
2. Chasing rewards?! They are watching you.
Often friends and family talk about the 'amazing' credit card they have signed up for. Their stories of saving money, claiming air miles and access to exclusive lounges lure us into going and checking out what the deal was about. Not denying that it may be a good deal, but stop before you decide to sign up.
Having a bunch of 'amazing' credit cards, signed up primarily because they have good rewards scheme can prove detrimental for your CIBIL score.
Banks can view you as a credit risk if you aren't organised while picking credit. Credit utilisation and repaying on time is a task which requires a good tracking system. If your tracking system is not in place it is possible that you miss out on repaying or end up spending more than you intended to. Your wallet and CIBIL report, both will be affected as a result of the reward chase.
3. Mind your score!
Reward credit cards have a higher rate of interest. If that is the choice you have made then redeeming the reward points will definitely be on the list. However, while availing rewards you may end up spending more money. The repayment of which, if missed can lead to paying a heavy interest rate.
Moreover, these delayed payments can negatively impact your CIBIL score. Now the last thing you need after ending up spending more money is a drop in your CIBIL score!
4. I don't need it but let me buy my reward!
Credit card offers can be generous deals. The best offers are generally up to 5 per cent of the value spent as reward in some form or the other. Now if you are making a purchase with an eye on this offer, then you are in for trouble.
Spending 95 per cent of the money on an unnecessary purchase is far from being wise about spending. Availing the reward should be a bonus on the purchase and not a reason for the purchase.
5. Did you see the fee?
Reward cards charge a considerable annual fee. While we sign up for the cards, enticed by the rewards, the annual fee is often ignored. It is important to evaluate the total worth of the rewards as against the annual fee applicable. Are the rewards another reason for you to spend more? Does redeeming rewards means planning for unwanted purchases?
Answer these questions for yourself to know if the credit card rewards are actually helping you save. If not, look out for options with lower or no annual fees and do away with unwanted temptation to spend more for redeeming reward points.
6. Watch out if you are shopping for more debt!
If you already have a credit card with a credit limit which is utilised regularly and timely repayments are being done then you are in the right zone. This approach will help you max out the benefits of using a credit card while positively keeping up your CIBIL score. Don't let greed take over and make you hunt for reward cards.
While the immediate benefits like signing up bonuses and short term benefits like using a certain amount within a limited period of time in return for reward points may appear lucrative, it is a bad idea in the long run.
You are actually taking on more debt even though you don't need it! We definitely don't need to find newer avenues to part ways with our hard earned money.
7. Focus on your goals more than the rewards!
To stay out of trouble and sail smoothly it's important to stick to your personal financial goals. A part of this plan is sticking to budgets every month. Major expenses are planned and money is set aside for such expenses beforehand. Credit card rewards can prove distracting while you are trying to stay focused on planned spending.
To avail rewards, we convince ourselves to get off the budget plan. Bad idea! The thrill of availing the reward not only takes us off the road leading to our financial goals but also drills a hole in our pocket. So remember, goals over rewards any day.
Credit cards when planned and used can indeed help us save and give us access to money when required. However, using cards to accumulate reward points and then planning ways to redeem them is not a great idea. Focus on your financial goals, plan your expenses and aim to save. Keep off those credit card reward carrots!
The author is Co-founder and Director Credit Vidya.