Credit Cards With Rewards: Are They Worth It?

Credit cards with rewards or without? Chances are you've wondered which one is the best deal for you in the long run. Perhaps a little background will help you decide.

You know what those rewards are: frequent flier miles, points that you can redeem for merchandise or discounts on travel, a cash-back rebate at the end of the year. Those rewards are very tempting, aren't they?

However, you need to remember that those rewards aren't free. Unfortunately, the saying is true, There's no such thing as a free lunch.

In order to gain those rewards, you will have to pay somewhere down the road, because the credit card company has to pay to give them to you. For instance, you may end up paying a higher interest rate or a higher annual fee for the privilege of using that card. Those higher costs pay for the rewards you covet.

Likewise, if you use get frequent flier miles, you may have to meet certain restrictions in order to use them. Or, that discount you get for a hotel room may still result in a higher hotel bill than you would have gotten at a competing hotel.

That's not to say that all rewards programs are bad -- on the contrary. They can be very beneficial if you travel a lot or face other circumstances in which you really do need to use your credit card. You really can gain by using your card wisely.

Wisely is the key word here. Don't fall into the trap of running your card through the store scanner at every opportunity just to gain the rewards. You will still have to pay the balance eventually, including interest if you don't pay it at the end of the month.

You also need to compare rewards programs. Frequent flier miles won't do you any good if you don't fly all that often. Neither will gift cards to luxury department stores if you don't have one in your area. Rewards will do you absolutely no good unless you can use them.

On the other hand, if you have the goal of taking a once-in-a-lifetime trip, consider using a card with a rewards program that will help make that dream come true. Likewise, if a loved one is getting married soon, use a card with a rewards program that will allow you to give an extra special gift.

As with anything, it pays to carefully read all the fine print and compare offers. Consider whether the interest rate and various fees will offset the rewards or vice versa. Don't sign up for every reward program available ñ creditors will note if you have a plethora of cards and may downgrade your credit score for doing so, recognizing that you could potentially rack up a lot of debt suddenly.

Do your best to pay your balance each month and don't overuse the card.

So, should you look for credit cards with rewards? That depends on what you want. Carefully weigh all the options and choose the card that meets your goals.

Credit Cards: How Does Your Credit Card Work?

Your credit card is probably not something you think about very much. It's very important to understand how credit cards work so you can use them correctly.

Here's what you need to know.

While there are different types of credit cards, they work essentially the same way: The company issuing the card is saying that they will guarantee your payment for whatever purchase your card was used for. For example, if you used your MyCreditCard (fictional name) card to pay for your $10 Burger Bell lunch, Town Bank (fictional name), the bank that issued your MyCreditCard card, is guaranteeing Burger Bell it will get paid the $10. You basically used Town Bank's money to eat your lunch and MyCreditCard made it easier for you to do so.

However, Town Bank has some rules for using its money: Either you must pay for your lunch (and all other purchases made with that card) by the end of the month or else you will have to pay interest on each purchase. If Town Bank has an interest rate of 18 percent, you will pay $11.80 for your Burger Bell lunch.

Town Bank or MyCreditCard may also charge a late fee if they don't receive your regular monthly payment on time. Let's say this month your Burger Bell lunch was the only item on your statement, so you forgot to send in the payment on time. If the late fee on the card is $25, the cost of that lunch is now $36.80 (quite a lot for a burger and fries, isn't it?).

Remember that stores that accept certain credit cards must pay those card companies for the privilege. That's why so many small or new businesses don't accept them -- they can't afford to do so.

As we've seen from the recent financial crisis, banks and card companies are businesses and are out to make a profit. While we don't like interest or annual fees, those are how the card companies make their money. In order to keep money coming in, they often offer new programs and cards and try to persuade you to take part. There's nothing wrong with that, but if you are trying to watch your spending, it is best to be cautious and read all the literature available before accepting a new card.

To manage your funds in the best way possible, keep only one or two major cards. Cancel all the rest (cut up the cards and dispose of them securely to avoid fraud). Use the cards only in a true emergency (that is, for car mishaps, major repairs etc.). Don't use them just because you're too lazy to get to the ATM first. When you get your statement at the end of the month, do your best to pay off the entire balance. If you have a balance, pay off as much of it as possible.

A credit card can be a blessing in a financial crisis. When used sparingly, you can have the money you need without paying your bank extra for the treats you want.