Do Reward Credit Cards Encourage Extra Spending?
Impulse Buying Can Cause Financial Difficulties and Personal Debt
Apr 25, 2009
Reward credit cards have grown in popularity because they offer consumers the opportunity to get something for free. Buying £100 worth of groceries with a cash back credit card earns the customer a £1; it previously earned them nothing. However, consumers often overestimate the value of these incentives and are drawn into impulse buying which can lead to financial difficulties and personal debt.
How Cash Back Credit Cards Work
A cash back credit card provides a consumer with the opportunity to enjoy up to 1 per cent of their total spending as a cash rebate. Customers that use these reward credit cards are able to earn extra cash by making everyday purchases on their card as opposed to paying in cash.
How Airmiles Credit Cards Work
The airmiles credit card operates on the same principle as the cash back credit card in the sense that it allows customers to accrue points based on their cumulative spending. These points can then be converted into air miles that are in turn used to fly to any country in the world.
Reward Credit Cards can Cause Personal Debt
The prospect of earning 'free money' with a reward credit card can lead to impulse buying or even credit card debt. A number of cash back credit cards offer customers as little as 0.5 per cent, yet consumers spend thousands of pounds on their cards in order to benefit from this 'freebie'.
Impulse Buying Leads to Financial Difficulties
Impulse buying on a reward credit card can lead to personal debt that a consumer is unable to pay off. Making the minimum monthly repayment because of financial difficulties will mean that the net benefit of this cash back offer has been completely eroded by interest payments.
High Interest Personal Debt for Minimal Financial Reward
According to CreditAction.org, card providers charge customers an average of 17.92% APR. If a consumer spends £5,000 on their reward credit card they will pay £896 in interest per annum.This doesn't take into account any additional late payment charges or cash advance fees. However, the £5,000 of spending has only earned the customer £50 in cash back.
Whilst a reward credit card is perfect for those who have the necessary self-control to stick to their everyday purchases, it can result in financial difficulties and personal debt for countless others. It is absolutely essential that the full card balance is settled in full each month in order to prevent the accrual interest and any benefit of the card being negated.
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