Living with credit, Protecting yourself, Rewards

As credit card rewards increase, so do the risks for cardholders

Kelly Dilworth

Credit card offers have become so generous lately it often feels as if we’re living in a golden age for card rewards. If you’ve got good credit and can afford to drop more than a thousand dollars a month on card purchases, you can potentially scoop up hundreds of dollars in free cash or swag or purchase a complimentary trip with your rewards.

But as card APRs hit record levels and penalty fees continue to trend upward, charging huge amounts to a card just for the rewards is also getting riskier – even for people who are sure they’ll repay their balances in full.

According to research from the American Bankers Association, just over 29 percent of cardholders use their credit cards as payment tools, rather than long-term loans, and regularly pay off their monthly balances.

According to ABA chief economist James Chessen, the percentage of cardholders who pay their balances in full has edged up in recent years. “My sense is we’re seeing a longer-term trend away from revolving balances,” he says.

Many cardholders, myself included, typically use their cards for everything from groceries to coffee runs and rarely use cash or debit. It’s a strategy that I often recommend to readers who want to make the most of their rewards cards.

As long as you can afford to repay your balance in full, using the same rewards card for all or most of your monthly purchases is often the best way to maximize your earnings – especially if you want to earn enough points or miles to pay for a free flight or other high-dollar purchase.

Credit cards also come with a host of consumer protections, such as price protection and extended warranties – potentially saving cardholders a ton of money if a purchase goes wrong.

But as Consumer Action’s Ruth Susswein recently reminded me in a conversation about credit card interest rates, many people who planned to never carry a balance wind up with debt they didn’t expect. Life gets in the way, and even the best-laid plans can go up in smoke.

Danger zones: High APRs, late fees, penalty rates
If you’re carrying a high-APR rewards card, then an unexpected medical bill, car accident, job loss or pregnancy could force you to carry a balance for an extended period. That could cost you hundreds of dollars in unplanned charges.

As credit card APRs continue to spike, the risks of such a strategy are getting greater. According to CreditCards.com’s Weekly Rate Report, the average card APR has climbed to an all-time high of 16.15 percent – and that’s just taking into account the minimum amount that issuers charge.

The average maximum APR has ballooned to 23.48 percent, while the average median APR (which is closer to what most people are probably paying) has climbed to 19.82 percent.

As the Federal Reserve continues to gradually increase its benchmark interest rate, card APRs will only get higher.

Late fees also are inching up, making credit cards costlier if you miss a payment. A recent CreditCards.com survey, for example, found 99 of 100 cards surveyed charged late fees and a number of issuers have hiked their late fees to $38. Many rewards cards also charge penalty rates as high as 29.99 percent.

So far, consumers have weathered higher credit card interest rates relatively well, Chessen says.

ABA research shows that many consumers are still relatively conservative about how much they charge. As a result, late payments on credit cards are still at historically low levels, despite inching up over the past year.

“Consumers have been very diligent in managing their debt, particularly on credit cards,” Chessen says. “They’re well-positioned to handle modest increases in interest rates because they’re not overextended now.”

But other analysts have warned that as card rates continue to climb, households could become financially strained, leading to an uptick in delinquencies. Last year, the credit agency TransUnion, for example, correctly predicted late card payments would tick up in 2017, in part because of higher interest rates.

Cash or debit instead of credit
The ongoing riskiness of credit cards has prompted some consumers to just go without them altogether.

My dad, for example, has always used cash for most of his purchases and prefers to use a charge card when cash is less practical. Unlike some people who avoid credit cards altogether, he’s well acquainted with card rewards and has used them to pay for concerts and weekend getaways. But the lure of free rewards isn’t strong enough to entice him to use cards more often.

Credit cards, he says, encourage overspending.

“I’m older now, and I have more discipline,” he says. “But in my younger, less disciplined days, if I had a credit card that I didn’t have to pay off every month, I would have just said, ‘Well, I’ll just pay part of it this month,’ and then I would have fallen into the black hole of debt.”

The case for rewards cards, if they’re managed wisely
As a rewards card fan, I wanted to encourage my dad to reconsider. He could be earning so much more in rewards, even if he continued to forgo credit cards and just used his American Express charge card. But he has a point.

Research shows that credit cards do tempt people to overspend, and they pose a real danger – especially if you’re living on a budget and can’t afford a surprise charge.

I’m not ready to give up plastic myself. I’ve saved a ton of money on free travel and supplies for my son by racking up rewards points with everyday purchases. But the ongoing spike in interest rates is a good reminder of how important it is to limit how much I charge to my cards.

If I wind up with debt I can’t afford, none of the free trips or gift cards I’ve earned with my rewards cards will be worth it.

See related: 5 ways to cut your debt as interest rates rise, Guide to rising credit card interest rates, Options for escaping penalty rate APRs

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