Your Credit Card Rewards Aren’t Worth As Much As You Think

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With issuers dangling bonuses like $100 cash back just for signing up, it can be easy to lose sight of exactly how rewarding (or not) credit card rewards truly are. You may be asking, why should it matter? It’s true that many people think of credit card rewards as “free money” they get for buying stuff they would anyway. Even a small reward is better than no reward. But there are a few flaws with this line of thinking. Let’s start with the fact that those rewards are probably worth way less than you would have imagined. Then there’s the possibility they could easily be wiped out with just a short stint carrying a balance.

An extensive new study of credit cards in Australia found that only five out of 67 cards studied ever returned more than $100 to cardholders annually — and that’s for people who charge $16,000 each year. On the flip side, about a third of the cards studied returned less than $20 in rewards. (For both measurements, card comparison site subtracted the cost of the card’s annual fee from the reward earnings.) This wouldn’t seem to square with the outsized sign-up incentives on credit cards here in the U.S., but the study’s findings shouldn’t be dismissed so easily.

First of all, that point about the annual fee is a crucial one. Credit card terms and reward programs in Australia are fairly similar to those in the U.S. A growing number of high-end rewards cards in both marketplaces charge annual fees in the neighborhood of $60 to $95 — and that’s on the low end. Airline-affiliated ones that give the user access to airport lounges and offer perks like priority board often charge fees that are even higher.

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These rewards are only granted after the cardholder hits a certain spending threshold — almost always in the low four figures — within the first few months of having a card application approved. For people who aren’t used to charging big-ticket purchases, reaching this benchmark might be impossible or hinge on buying a lot more stuff than they otherwise would.

That’s another tricky thing about rewards cards: They coax you to spend more than you otherwise would — or, it can be argued, should. A study conducted by the Federal Reserve Bank of Chicago found that a 1% cash back rewards program — which earned cardholders an average of $25 in rewards each month — prompted people to spend an average of $68 more and increase their total revolving debt by $115 each month. Translated: Not only do people spend more, but they pay off less at the end of each month.

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This isn’t to say rewards cards can’t be useful for people who carefully monitor their budgets and pay their balances in full every month. But barring that, those rewards are likely to cost a lot more than you think.