Quoted on MoneyGeek.com on Cash Back and Reward Program Credit Cards

Recently the personal finance site MoneyGeek asked me to answer some questions related to cash back and reward program credit cards. Following are my responses.

What mistakes do people make with credit cards, and specifically rewards programs?

The biggest mistake people make with credit card rewards programs is thinking that charging everything to the credit card will provide huge rewards. At the same time, those people often carry balances on their cards and end up paying high rates of interest. Most reward cards charge higher rates of interest than cards that do not have rewards.

As an example, my Barclays Aviator card gives me one mileage point on American Airlines for every dollar I spend. However, the interest rate on the card is 19.9%. I just checked American Airlines. I can fly from Los Angeles to New York for 33,000 mileage points, which means I need to spend $33,000 on my credit card to purchase that ticket. Alternatively, that same flight, I can purchase for cash for $245. Chances are unless I am very careful, I will pay more than $245 on the outstanding balance. I’d be better off using a low-interest credit card and paying cash for my travel.

What are the “gotchas” about credit cards and rewards programs that are not well understood by consumers?

As an example, I wanted to book a flight to London from Los Angeles. I was open to dates, but no matter how hard I tried, I could not get booked on the direct flight to London. Sometimes there was space available, but the number of points needed to book the flight was much higher than booking a flight that had one or even two stops.

I also once booked a hotel room using points and got the room right next to the elevator. When I talked to the front desk person, he informed me that the “elevator rooms,” which tend to be noisy, are typically given out to people booking with rewards or using discount websites like Priceline. I know a lot of people who have hundreds of thousands of mileage points but can never seem to use them due to a lack of availability of decent flights when they try to book (and I am one of those people).

What advice can you give consumers about managing their cash back rewards cards?

Cash back cards are much better than rewards cards. It is important, however, to understand how you get the cash back. With many of these cards, you build up a “cash back balance,” but you don’t get the money until you request it. People forget that their card has a cash back feature. Or even worse, they carry a balance on their card but don’t bother to request that the cash back available is applied to the card balance. Also, the cash back is never enough to cover the cost of the interest you will be charged on the card if you carry a balance. Unless you religiously pay off your card every month, get a card with low interest and forget about the cash back rewards.

You can see the original post on MoneyGeek.com by going to: https://www.moneygeek.com/credit-cards/cash-back/#expert=michael-manahan