Rate vs. Reward: A Credit Card Dilemma
Credit card companies flood our mailboxes with generous offers, but how do you know which cards are the most valuable? Get a look inside the differences between a rewards credit card and a low-rate card.
There are many credit cards available these days. Some tout a great low rate while others offer exciting rewards. It can be hard to decide which type of card is better. And “better” is subjective because the right card all comes down to you and your evaluation of your spending and repayment habits.
A rewards credit card awards the cardholder with perks in the form of points, air miles or cash back, and is usually more beneficial for the type of cardholder that spends frequently but pays off the balance each month. These credit cards typically have higher annual percentage rates. By paying off your balance each month, you can earn your rewards but avoid any interest charges that might negate the value of those rewards. The amount of cash back or travel rewards you could earn might not be worth the interest you could end up paying over time if you carry a balance.
Low rate card
A low rate card generally has a below-market annual percentage rate. This type of card is better for cardholders that will carry a balance from month to month. Paying less in interest charges is more beneficial than the potential rewards you could earn.
More differentiating factors
Sign-up bonuses can make one card significantly more valuable than another. These incentives range from 0% introductory APRs to extra points. A 0% APR can be helpful when consolidating debt onto one card, but may come with hefty balance transfer fees. On the other hand, many rewards cards will make offers such as 10,000 bonus points, but require a certain spending level in the first few months. Consumers should weigh the bonuses against any potential costs before choosing a card.
Also, if the card charges an annual fee, has expiration dates on rewards or other limitations, it could outweigh any rewards or bonuses that come with the card. Be sure to read the terms and conditions of any rewards program or introductory offers before you apply. Doing so can help you avoid any frustrations down the road.
Whether its rewards, a low rate, a generous limit or something else, all credit cards offer a benefit to you. So while reading about and understanding the card is paramount, recognizing your own spending and budgeting style is equally important in helping to determine the right card for you.