Ambareen Musa CEO and Founder of Souqalmal.com rounds up the pitfalls to look out for before you delve into the business of credit card reward programs.
Loyalty reward programs on credit cards promise everything from cash back to free flights if you spend a certain amount each month. Banks offer these rewards as an incentive for spending more on their card. In the pursuit of great rewards, it is easy for consumers to get carried away. We summarize the full particulars of these credit card reward programs so you can have them work to your advantage.
What’s the Catch?
Reward cards are typically offered at a higher annual fee as well as a higher interest rate than traditional credit cards. The rewards offered by banks on credit card spend come at a cost to the bank. To make up for this cost, banks rely on credit card revolvers – The ones who carry a balance on their credit card. It is the interest that you pay on your credit card that generates revenue for the card providers.
For the average consumer, the lure of a reward leads to large spending and possibly, debt accumulation. More often than not, the value of these rewards does not compensate for the amount spent by the cardholder to meet the minimum spend requirement every month. Spending more to take advantage of the reward, in turn, defeats the whole purpose of getting the reward.
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