Credit Card Reward Programs

Credit cards are an epidemic these days and the sad reality of life is that most credit card companies just really don’t care whether you’re drowning in debt or being responsible with your money. In fact, the more irresponsible you are with your credit card debt the more money they make, so they offer you cash back like the Discover more card, or airline miles, or an assortment of other trinkets to tempt you in to signing up for a credit card and racking up the debt.

When I was in college about a decade ago, I was walking to the dining hall and I noticed a large crowd surrounding table outside the doorway. Of course being the curious type I needed to know what everyone was looking at. Turns out there was a credit card company (with cute girls passing out sign up forms) that was giving away free bags of M&M’s (the large bag… not that it matters) if you signed up for their credit cards that they were offering.

In college I was terrible with credit cards, but at least I knew what a scam of an offer this was so I shook my head and continued walking. The other day Jessica from MomVesting commented that “the bonuses and perks of credit cards are like offering cake and ice cream” and it reminded me of this incident and it got me wondering how much each of those bags of M&M’s cost the average student.

According to CreditCards.com’s debt statistics, the average college student finishes with around $4,100 in credit card debt by the time they graduate (which is around what I graduated with too). So for the purposes of this calculation let’s assume that the average rate is 19.99% (splitting the difference between the good and bad payers).

If these students were to make the minimum payment on these cards, which is now 4%, they would pay $164 per week while interest starts at over $68 per month. At this rate, making only the minimum payment the average student would take 33 months (2.75 years) to pay off this balance, assuming they didn’t put a single penny on the card and faithfully made payments after college. I think it’s probably safe to say that many of the people who signed up for that card had a problem with credit card debt somewhere down the line.

When you do the math this comes up to a whopping $1,247.23 in interest alone… that is one expensive bag of M&M’s!!

Now while this is an extreme example of many foolish kids not realizing what they were getting in to by signing up for the card, there is a valuable lesson here about the bonuses and rewards that credit cards offer. If you are drawn to a particular credit card because of some incentive plan they are offering, at least do yourself a favor and look in to these aspects of the card:

• The APR % after any introductory rate wears off
• What the APR % jumps to should you miss a payment or make a late payment
• How the reward program actually works and what restrictions there are
• Do you get the rewards if you don’t pay off your balance in full?
• Are there any annual fees associated with holding the card?

And MOST importantly:

• Am I Responsible Enough To Make Payments And Not Run Up A Huge Balance?

Credit card rewards can be great, and there are a lot of benefits to owning a credit card. I know a lot of people who use cards responsibly and get big bonuses for doing so, but for every person I know who is responsible I know at least ten people who are the exact opposite and will be digging out of credit card debt the rest of their life. You would be much better taking advantage of a 0% balance transfer offer instead to try to knock down that balance.

What’s in your wallet? Is it worth it?

Tagged as: credit card