Dubai: Rewards credit cards offer an alluring proposition, the promise of free points and miles for each dirham you spend.
Many rewards cards even offer signup bonuses worth Dh500 or more at the start, and that's in addition to the rewards you earn when you shop or pay bills.
The problem? Not everyone can or should pursue rewards, for several reasons. In some cases, trying to earn rewards can even damage your finances, hurt your credit score, or both.
Before you sign up for a cash back credit card or travel credit card, it's crucial to know the many ways pursuing points and miles can hurt you.
1. Going into debt by chasing rewards:
A recent analysis of global credit card data revealed that only 45 per cent of individuals with credit cards are paying their balances in full each month.
This means the other 55 per cent carry a balance at least part of the time, and it's easy to assume at least some of those people are pursuing rewards, or is it?
Because the average credit card now comes with an annual interest of over 17 percent, so try to earn 1 to 3 percent back while paying over 17 percent in interest.
If you're charging purchases you can't afford to pay off each month just for the rewards, credit card rewards are not for you.
You'll be much better off using cash or debit instead since those options won't leave you grappling with high-interest debt.
2. Overspending to earn a signup bonus
Most cash back and travel rewards credit cards offer initial welcome bonuses to entice you to sign up.
Many times, these bonuses are worth Dh500 or more in points or miles, and all you are required to do is meet a minimum spending requirement (e.g. spend Dh3,000 within three months of opening the account to earn 50,000 bonus points).
While these offers are tempting, they can be problematic if you need to spend more than you normally would to meet the threshold.
If your normal spending and bills don't add up to the minimum spending requirement within the allotted amount of time, what are you going to do?
Way too many people use minimum spending requirements as an excuse to splurge for new furniture or plan a vacation. Unfortunately, this means the rewards they earn won't leave them ahead financially.
They may wind up with new products or a trip to look forward to, but they also wind up with less money than when they started, which isn’t rewarding.
3. Too many annual fees
And what about the annual fees many of the top rewards credit cards charge? Top travel credit cards charge annual fees of Dh450 or more, which is a lot of money no matter how you cut it.
While annual fees can be worth it if you earn a lot of rewards and use travel benefits and perks regularly, they still add up.
Before you sign up for too many credit cards with annual fees, make sure you have a plan to get more value than you're paying for. If you can't do that, then it's probably not worth it.
4. Damage to your credit score
Don't forget that the way you use credit cards can negatively impact your credit score. For example, opening new credit cards means having another hard inquiry on your credit report, which could cause your score to temporarily drop.
Since your payment history makes up 35 per cent of your credit score, falling behind on your credit card bills can also create a big problem.
With your credit utilisation — how much you owe in relation to your credit limits — making up another 30 per cent of your score, carrying large balances can hurt your score as well.
The bottom line
Credit cards that dole out points and miles can help you score free travel, earn cash back, or get other freebies, but that doesn't mean they're destined to leave you better off. Ultimately, the way you use your credit cards will determine whether they're a net positive for your finances.
Before you sign up for a rewards credit card, it can help to have a basic plan in place. Figure out how you can earn a big signup bonus without making unplanned purchases, and make sure you have the discipline to pay your balance in full each month. From there, make sure you're only paying annual fees on cards that are worth it.
If that sounds like too much work, then it probably is. Cut your losses and stick with debit instead.
While credit cards do come with better protection against fraud, the potential for rewards, and valuable consumer protections, they can make it easier to overspend and wind up in debt.
Before you sign up for a credit card and start using it for purchases, it's important to make sure you're committed to staying on budget and spending only what you can afford.