Don’t Chase the Carrot – The Dangers of Credit Card Rewards
A flight to Brisbane, a new iPhone X or even money back when you spend…
These are some of the rewards offered when we use reward credit cards. Reward credit cards sound great at first! We get points for spending money, and eventually, we will get a cool exclusive bonus for doing so. We were going to spend the money anyway, so getting the extra gift is exciting! All of this sounds fine and dandy until we look into the finer details of what it costs to actually get these bonuses.
A free flight to Brisbane might seem like a cool bonus to work towards, but if you look at how much you need to spend to get the flight, it may not be. For example:
1 Airpoint with an Air NZ Standard MasterCard = expenditure of $120
A cheap return flight with Air NZ from Dunedin to Brisbane = $403
Every 1 Air NZ Airpoint converts into $1 for air travel, meaning we need 403 points
So 403 Air points would cost us (403 x 120) = $48,360
$48,360 would have to be spent on our credit card so we could get a free trip to Brisbane with our Airpoints alone. We could argue that our points never expire, as long as we keep the card open, but this means we have to pay our annual fee of $65 a year.
If we are able to pay off our credit card balance each month and don’t have to pay any interest charges (20.95% p.a.), then realistically our trip would only cost us the annual fees for the card ($65).
If we divide the advertised cost of the trip ($403) by the annual Card fee ($65), then we would be left with the maximum term, we have to spend the $48,360 and earn the necessary 403 Airpoints, before the cost outweighs the benefit.
403 / 65 = 6.2 (six years)
$48,360 / 6 = $8,060 per year needed
So as long as we spend on our credit card, at least $8060 each year for up to six years, then we would be benefiting from our credit card reward. We don’t know if spending $48,360 with our credit card, just to get a return flight to Brisbane seems worth it to us.
We have to weigh up the costs of credit card rewards because just like dangling a carrot in front of a horse, the extra incentive can cause us to strive for a goal that the everyday New Zealander would struggle to obtain. Credit card rewards can cause us to spend more than we usually would, just in the hopes that we earn points to our end goal. We could find ourselves spending an extra $10 – $20 at checkouts, just because we were shy of the $120 to get ourselves a reward point. We could easily save that $10 a week that we spend extra at our supermarket shops to get a reward point, and then pay for our trip to Brisbane ourselves. Reward points are usually not worth the trouble they cause, because the monetary value of the reward doesn’t match up with the amount we have to spend to get them. Credit cards providers wouldn’t offer the rewards in the first place if they knew they would be losing money for them. Credit card rewards are a dangerous game, with the end goal of getting us to spend more money that we don’t have and increase the risk of having to pay interest at the end of the month.
We need to ask ourselves if we are able to handle the credit card and if we are capable of paying the balance off every month! Some of us use credit cards to help improve our credit score, but there are safer ways of doing this, like making sure we pay our bills every month. Don’t fall into the habit of paying with plastic so that you can get a treat that you don’t need. Borrow responsibly with a personal loan and leave your card at home. Treat your money like money, don’t treat it like a game.