PROS AND CONS OF CREDIT CARD REWARDS

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   When Big Finance introduced rewards based credit cards, they did so hoping to compel consumers such as you to use credit more often, earning them bigger profits. Rewards were found by the Consumer Financial Protection Bureau to be the top reason why consumers chose a credit card.

   So, how has this turned out for Big Finance and consumers? Initially, rewards were a profit driver for Wall Street executives whose companies issued the cards. In 2014, credit cards earned them a 5% return on investment. Then, consumers learned how to game the system. It is predicted that 14 large banks highly concentrated in the credit card business will only return 3% on assets in 2019.

   "It's a game really - like poker," said Blake DiCiocci, who has used credit card reward points to fly around the world with her husband. As consumers like DiCiocci have learned to spend just enough to earn the rewards, profits for the banks have fallen. This is compelling banks to cut back on rewards or to eliminate them altogether. Don't worry, rewards are not going away. The banks are just rejiggering the carrots so they can achieve higher profits.

   For consumers, the rewards are viewed as a bonus. They not only get the merchandise bought with the card, they worked towards or earned a reward. There are, however, a few problems with the use of credit cards. Topping the list is that most people do not use them properly.

   Many consumers who use reward cards regularly get the card with the best reward. This often leads to closing a credit card account as they open a new one. The problem with this is that it hurts their credit score. How old an account is and its payment history figures into more than half of a credit score's calculation. Closing a credit account and opening a new one lowers that all important credit score, which increases the rate of interest on future credit uses.

   In the last year, the amount of credit card debt has reached record levels. Hey, but I got a reward and took a trip for free. If the bill was not paid in full at the end of the month and you paid a finance fee, the reward was not free. This is a factor many consumers fail to consider. Most credit cards do not charge a finance fee if the bill is paid in full monthly. When a balance is outstanding, the fees are exorbitant, ranging from 16% to 24% annually.

   The average American consumer has $19,000 in credit card debt. If we figure a 20% APR, that equates to a $3,800 interest fee, which does not include other fees that may attach to holding the card. How many hours of work do you put in to pay a creditor that amount of interest? Sadly, a lot of people never make this calculation. They just pay the bill.

   Another factor many consumers fail to consider is that maintaining a balance above 10% of the credit limit decreases their credit score. That is because a significant factor in credit score calculation is the rate of utilization, or how much credit you have used when compared with the amount of credit available to you.

   Anyway you figure it, a credit card balance that is not paid off monthly costs you money via a finance fee or an increased rate of interest because of a lowered credit score. This is what Big Finance is counting on by offering rewards. They hope you will use their card to get a reward. They make money by receiving a fee from the merchant who accepted your card to make the purchase, and they make even more money when you carry a balance over to the next month. For the consumer, this means the cost of the purchase is increased or the reward carried a cost.

   The best way to build a credit score is the regular use of credit cards. They, however, must be used properly and in a way that assures you are actually getting a reward and that the cost of a purchase is not increased. "This is what we teach consumers to do," says William Bradley, co-author of Winning the Credit Score Game. Your financial health is contingent on knowing how to use credit properly.

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