New Study Reveals Misunderstandings About Credit Card Rewards

Credit Card Rewards

A lot of people use credit cards to earn rewards. As it turns out, a very large number of them don’t quite understand how these rewards work, especially with travel rewards.

A great many people don’t take much interest in matters of personal finance, even though the effects of this lack of interest and knowledge can have significant effects upon their lives.

While there are issues considerably more important than how we use credit cards for rewards, every little bit does add up and get put into the positive side of our financial ledger. A proper knowledge of the availability and proper use of credit card rewards can make a measurable difference in our finances, as well as reducing the risk of frustration and disappointment with travel rewards.

A recent study shows that a great number of people lack a basic understanding about how credit card rewards work, and many those who are familiar could benefit from developing their understanding further.

The first thing that was revealed is that 2 in 5 people did not seem to understand the connection between the rewards and their accruing interest on unpaid balances. While it’s not exactly made clear what this means, it suggests that these people may purchase things to get the rewards without considering the cost of interest if they cannot pay the balance off by the due date.

This seems hard to believe though. The idea that 40% of people either don’t realize that they have to pay interest on unpaid balances, or that part of the rewards they receive include being exempt from this interest, just isn’t that plausible, even though it is conceivable that a small percentage of people would be this much in the dark.

There is a real possibility of the lure of rewards overly lessening their concern over paying interest, and perhaps this is what the respondents in the survey had in mind. We always want to be thinking about the net effect on our finances in these cases, although the lure of travel rewards can distort this calculation.

Ensuring That We Get It When Collecting Rewards

We really need to make sure that we’re looking at the overall picture here, and if it’s not money that we would be spending otherwise, we cannot let the appeal of rewards, especially the desire to travel somewhere, get in the way of sound judgement.

Rewards can certainly add to the value of the purchases we already make, but if this results in buying things we wouldn’t have otherwise, or pay several times more than the reward in interest, it is easy to see how this could lead to a problem.

This problem is made worse when we really don’t understand the true value of the points that we are racking up for a trip, when people overestimate their value. The differences here can be much more than minor.

On average, a reward point is worth one cent. 45% of people believe that they are more valuable than this, and 18% peg their worth at a dollar, a hundred times more than they are actually worth.

These distortions will further contribute to cardholders using rewards inappropriately and being harmed by the poor decisions that they may already be exposed to making without these misunderstandings of value.

On the other end of the scale, 11% of respondents did not think that these points had any value at all. If we are going to use a rewards card, we at least owe it to ourselves to be familiar enough with the terms and conditions of the offer to at least know what these rewards are worth so we can act accordingly.

There’s also the matter of not understanding how sign-up bonuses work, which takes us back to not reading about what we’re involved with. While these things can be complex, if any real confusion results, we can call on the credit card companies to provide the answers we need, but we do need to ask.

We Need to Be Particularly Careful with Travel Rewards

We especially need to be aware of what sort of usage a certain trip that we are hoping to pay for in rewards points requires, if for no other reason than to ensure that our plans are realistic. Trips tend to be planned ahead of time, with limitations on the amount of time we have to earn enough points, and we do not want to have to ramp up our purchases toward the end of these cycles if we’re close enough to be tempted.

The best value with reward programs is to use them on airfare, although only 40% of people use them that way. Some programs do not allow for this, and may just pay out in cash instead, but having the rewards program arrange these flights for you results in considerably more value from the buying power and restrictions involved.

One of the biggest mistakes that people commit with travel rewards is taking trips just for the sake of redeeming these rewards. If this were all-inclusive, and was really something that the cardholder wanted, this would just make sense. However, the additional spending that these trips involve need to be justified and afforded, and coming away with a balance after the trip is over that we really didn’t want or couldn’t afford should be avoided.

Credit card rewards can be a nice tool when used properly, and many people who would qualify to use these cards do not properly take advantage of them. We also need to ensure that we are not overly trying to take advantage of them either, to make sure that what we actually do receive is a reward and not something else.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken: ken@marketreview.com

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