7 common credit card traps to avoid

Getting free cash from credit card companies simply for spending is music to most people’s ears. However, financial experts are warning to be careful before rushing to sign up for cards that offer cashback rewards. For the savvy shopper, cashback credit cards can be a smart way of earning some extra pocket money while outlaying for regular monthly essentials but there can be pitfalls too. Experts give a rundown on how to avoid the seven common cashback traps.

 

1. The fine print

“Cardholders should always read the terms and conditions of their cards,” says Eyad Al Kourdi, Senior Vice-President and General Manager for the UAE, MasterCard. “When it comes to keeping finances safe, prevention is the best line of defence.”

Before signing up to any credit card deal, be wary of the small print, advises Diana Jarmalaite, Research Analyst with Euromonitor International.

“Credit cards are always a liability; therefore smart expenditure management is required for all credit cards users.”

 

2. Don’t be fooled 

“It’s important to understand whether an advertised rate is realistic for you,” says Waleed Barhaji, Business Head of Consumer Finance, Noor Bank. “On one hand, the cashback percentage may be based on an upward sloping scale — i.e. a high amount of monthly spend required to qualify for a high cash back percentage. 

“On the other end of the spectrum, there is likely to be a knock-out feature that caps the cashback amount the card issuer is willing to pay. 

“So make sure you understand both of these. Too low a spend, or too high a spend could mean that you end up with a smaller cashback than what a headline rate suggests.” 

 

3. Teaser cashback percentages 

“A 10 per cent cashback may sound like a great proposition,” adds Barhaji. “But, chances are that your card offers you this cashback only for a specific spend category — for example, dining only. Not only that, but there may be a dirham value cap, such as Dh300 a month.” 

 

4. Spending caps 

Some cards limit the amount of monthly or yearly purchased that qualify for rewards. “Most cashback programmes will have a dirham value cap on the amount that can be earned by a customer on a monthly basis,” says Barhaji. 

 

5. Exclusions 

Many cashback cards give you a choice on how to use your rewards. But some cards limit how and where you can actually reap the rewards. “Loyalty and Rewards programme have evolved considerably over the past few years,” says Barhaji. “Gone are the days of paper-based vouchers and limited avenues for redemption. Most loyalty programmes allow you to redeem directly for cash or through a wide network of retailers.”

 

6. Do your homework

Plenty of card comparison websites can offer tips on how much cash you would collect based on your spending habits. “You need to do your homework before choosing the card that makes most sense for you,” says Barhaji. “Your personal spending habits will determine which card is most suitable for you. There are specialist online product aggregators that allow you to make meaningful comparisons in a matter of seconds.” 

 

7. The urge to overspend 

This is perhaps the most important one to adhere to. With cashback, customers can sometimes be tempted to spend money they would otherwise might shy from. Al Kourdi advises consumers to enrol for SMS alerts with their financial institution where possible in order to receive alerts every time a transaction is made with their credit or debit card. 

 

“You need to make cashback work for you by optimising rewards on your spends,” says Barhaji. “A lot of consumers fall into the trap of overspending to chase cashback rewards, which does not make sense financially. “For example, if you buy a Dh1,000 TV that you haven’t budgeted for, or don’t need, just to get a 10 per cent cashback offer, you have still overspent by Dh900. “If not managed effectively, this can very quickly spiral into more debt.”