Cashback, airline miles, or reward points?

Most of us with credit cards love to collect whatever rewards have built up as a result of our credit card use over time.

Have you ever wondered how credit card companies can afford to give cashback and pay airfare for thousands of cardholders?

First, it’s important to understand the different ways that credit card companies make money:

1. Finance Charges

If you have debt at the moment or just want to see how much money credit card companies can make from one account, try a credit card debt calculator.

After realizing how much money credit card companies can make each month on just one account, multiply that number by millions and that’s how much credit card companies can make from card members carrying a balance.

2. Transaction Fees

Consumers are often unaware of the fees that businesses pay for accepting credit cards.

Occasionally a business will pass along that cost to the consumer whether it’s charging a fee for a small transaction or paying more per gallon of gas.

Credit card companies increase revenue if more cardholders use their credit cards.

3. Yearly Membership/ Annual Fees

This yearly fee varies from one bank or card to another, but it’s typically anywhere from $20-$100.

When you have hundreds of thousands of cardholders paying fees every year, it can really add up. Some of the money spent on fees will go toward cardholder rewards.

Are Credit Card Rewards Worth It If You Go Into Debt?

Most consumers open their wallets or purses and have many options when reaching for a credit card. Credit card companies have rewards programs as a tool to make us choose their card. This is absolutely true in most cases, but we shouldn’t go into debt for those “rewards.”

Rewards cards can be great and sometimes paying an annual fee for real rewards can be cost-effective.

Take Roger. He earns between two to three free flights each year from charging his Delta Skymiles American Express card; he also recently got a free hotel room after paying for his company’s holiday party with his United Airlines Mileage Plus card.

The reason these are “real” rewards is that Roger pays off his credit cards every month; so he is not paying interest fees!

These are great benefits, but not worth the cost of the interest that you pay if you carry balances.

Although going on a trip with your airline miles or going out to dinner for free is fun, be sure to take into consideration what those miles or dinners actually cost you.

• The benefit of getting 1 percent cash back on purchases can disappear in just one month if you acquire finance charges on the account.
• If your card has an APR of 12 percent and you acquire a finance charge for one month on a purchase that you have already paid back, the 1 percent that you received as an incentive to buy was not worth it.

If the interest rates were higher or a large portion of the balance was owed for many months, the benefit of cashback can be erased much faster even if the reward was as high as 3 percent.

Don’t let credit card reward programs motivate you to overspend and break your personal budget.

Remember that the small incentives offered can end up costing you much more in the long-run.