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Living with credit, Rewards

Beware charging big-ticket items just for rewards

Kelly Dilworth

As card rewards get juicier, it’s getting harder to resist putting big expenses, such as home repairs and renovations, on a high-rate rewards card.

A recent survey by online lender LightStream found 29 percent of well-to-do homeowners (up from 16 percent in 2016) plan to use their credit cards to pay for home improvement projects costing $5,000 or more. That compares with 60 percent who plan to tap savings, 9 percent who will use a home equity line of credit and 7 percent who will seek a home improvement loan.

Who wouldn’t want to rack up the points for airline tickets and hotels while paying for a kitchen remodel or a new deck? But can you afford to? Unless you’re so wealthy you can easily pay off those big charges by the time your monthly bill is due, lower-interest payment options may be a better option, experts say.

“Though credit cards typically advertise rewards, they may, in fact, have high-interest rates or convert to higher rates after an introductory period of time,” LightStream’s Todd Nelson said in a news release. “For large-ticket home improvement purchases, credit cards may not be practical.”

So why do so many people put home remodels and other major expenses on their cards?

For some cardholders, the lure of accruing more rewards is so strong that charging a big-ticket purchase feels worth the risk. That may be especially true as card issuers in recent months have ramped up benefits to win over more cardholders, making you feel as if you’re missing out when you don’t collect rewards for a major purchase.

The high-stakes allure of chasing credit card rewards
Until I started donating most of my card rewards, I used my credit cards every chance I got – even for four-figure expenses that would have caused my balance to balloon if I didn’t immediately pay them off.

For months, I used my Discover it Miles card to pay for my son’s daycare – which, in California, is nearly as costly as public college tuition – because I was temporarily earning 3 miles for every dollar I spent. I also used one of my rewards cards to pay for our cross-country move from Ohio to California, and I even considered paying my quarterly self-employment taxes with a credit card just so I could cash in on bigger rewards.

As the rewards card offers my husband and I received became increasingly generous, I became more and more preoccupied with how much cash and free travel we could earn by using our cards for our biggest expenses. It was exciting to rake in free cash and other benefits just by using our credit cards.

I’m not the only one who’s gotten hooked on chasing credit card rewards. A Federal Reserve Bank of Chicago study found that cardholders often spend more money when using a rewards card – even when they have to roll over a balance.

Luckily, my family’s finances remained relatively stable and we managed to avoid charging more than we could afford to pay off. But if either my husband or I had lost work or experienced some other financial setback, we would have had no choice but to carry over our balances and suck up the interest.

And because our rewards card APRs tended to be so high (the average rewards card APR is 15.83 percent, according to CreditCards.com’s Weekly Rate Report), we would have paid a lot more in finance charges than we ever collected in rewards.

Most rewards cards generally award moderate spenders a couple of hundred dollars to $1,000 a year in free rewards, but if you fall behind and wind up carrying a balance, the interest you pay could easily dwarf that figure.

Go for boring with lower interest options
If you really want to save money on big-ticket purchases, such as home repairs or cross-country moves, stick with cash or choose a lower cost form of financing.

For example, a number of alternative lenders have popped up in recent years offering lower interest rate loans in exchange for more data about your personal and financial history. Traditional sources of financing, such as home equity lines of credit, are also much less expensive than high-rate rewards cards.

If you’re set on using a rewards card to pay for that updated kitchen or bathroom (or some other big expense), you may want to consider applying for a new card with a lengthy interest-free promotional offer.

Just be sure to limit your charges to what you can afford to pay off every month and before the promotional period expires. The only card rewards that are really worth your time are those you can earn interest-free.

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