Many popular credit cards are heavily advertised using the lure of rewards including cash back and free travel. From the bank’s standpoint, this only makes sense as few would be encouraged to apply for a credit card after being reminded of the possibility of debt or fees. While many cardholders are able to use their cards to earn fantastic rewards, these products are not well suited to those who tend to carry a balance.  In fact, there are three great reasons why those who have credit card debt should not be using reward credit cards.

First, those who carry a balance should be concerned primarily with find a card with the lowest possible interest rate. Unfortunately, these tend not to be available on reward cards. The cost of extending cash back or other types of rewards is justified by the higher interest rates charges. Yet from the cardholder’s standpoint, the higher interest rates offered on rewards cards will never justify the relatively small amount of cash back or loyalty points received. For example, the interest rate on a reward card may be several percentage points higher than that of the most competitive non-rewards card. The higher APR will more than offset the 1-2% cash back rewards that have become the standard.

Next, reward cards rarely offer 0% balance transfer offers. For those with outstanding credit card balances, these offers are vital tools that are necessary to reduce or eliminate interest charges while paying off debt. Since there are many cards that offer 0% promotional balance transfers for as long as 18 months, there is a tremendous amount of interest charges that can be saved versus a very small amount of rewards at stake.

Finally, the most important reason that those in debt should avoid reward cards is the perverse incentive that these products provide. The idea that customers will be rewarded for spending more is the last thing that people in debt should be told. Even if the incentives are far from the consciousness of the cardholders, any additional amount of money that is spent in pursuit of rewards is going to result in increased debt.

Those who carry credit card debt should be completely focused on paying it off, and should never be concerned with earning rewards. By looking for cards with the lowest interest rates and best balance transfer offers, cardholders can choose the card that will offer the greatest long term benefits rather than a few, relatively minor rewards.

Previous post March 2012 SBT Balance Transfer Credit Card Index
Next post Using Rewards to Reduce the Cost of Paying Taxes with a Credit Card