I was prompted to write this article by my dear old young, mom, I’ll call her Mama Ninja. She thought it would be valuable to explain the benefits and risks associated credit card incentives. I have blogged about credit cards a few times before, here, and here. But never really hit on the point Mama Ninja raised: “Is using a credit card with incentives a good idea?”
For those that don’t know much about credit cards, certain banks offer incentives with their cards to customers who purchase from merchants who accept credit card payments online, ultimately hoping it brings in more business for them. Some of the most typical offers are: 1%-3% cash back on all purchases or one frequent flier mile administered for each dollar spent. If you’re still a little confused…you’re dumb….just kidding (kind of). Basically, if you charge $10K to your card over the course of one year and you have a credit card that offers 1% rebates on all purchases, the credit card company will credit your account with $100 by the end of the year. If you have a credit card and it doesn’t have incentives you might want to consider tracking a good offer down and signing up, after all, it is free money.
So why would the credit card companies want to give money back to you? The answer is simple. Most people with a credit card carry a balance from month to month and that makes the banks filthy stinkin’ rich. *Side Note: If you have credit card debt, pay that ‘ish off ASAP, sell a kidney if you have to, because the interest rate on credit cards is ridiculous.* They offer incentives to entice new customers, with the hope that they will not pay off their balance each month. Think about it like this, if you carry a balance on your credit card, they win. If you pay your balance in full each month you win.
So why did I recommend you sign up for using an incentives card? I would only make that recommendation if you have a proven track record (6 months or greater) of paying off your full balances EVERY SINGLE MONTH or if you posses crazy amounts of discipline. If you can’t do that, don’t sign up for any more credit cards!
I personally have a card that rewards me one frequent flier mile for each dollar I spend. I have had the card for two years and have always paid the full balance before the end of the billing cycle. I pay $75 each year to Bank of America to hold their Alaska Airlines Credit Card. I would almost always recommend that you only use credit card incentives if there are no strings attached…like an annual fee.
Why do I deviate from my own advice? Although I pay $75 each year for the card, I not only receive the miles on each purchase I make, but I also receive one $50 companion ticket each year. The companion ticket just means if someone I know flies Alaska Airlines to any destination I can get a ticket with them for just $50. I used it a couple months ago when I flew to Seattle with a friend and paid $50 for the ticket, when it would have cost me $225 if I purchased the ticket solo. So for me, the cost of being a member $75 is worth it to get a $50 dollar flight. I basically paid a total of $125 for my plane ticket ($75 annual fee plus $50 ticket fee). I could get a variety of different credit cards that offered similar mileage plans, but none can compete with the companion ticket offered through Alaska. The incentives offered with my credit card are perfect for my situation. If your preferences differ, consider going with a cash back card, but at the end of the day, never forget…Credit card companies wouldn’t offer these incentives if they thought you were going to pay your balance on time.
If you do chose to sign up for an incentives card it is imperative you pay the full balance every month, on time. Now that I have bestowed wisdom upon you (actually you probably knew all of this) go forth and do great things.
…and in case you are wondering, I drew the plane up top…pretty good right?