Even as cost-conscious Americans take steps to save lots of money, some are driving themselves into deeper monetary holes.
Take travel-rewards bank cards, which shoppers use to assist pay for enterprise journey and holidays.
On the floor, travel-rewards playing cards seem to be a very good deal. You open a card for private use, pay for items and companies with it, and stack up cash-saving rewards factors you should use to your subsequent journey.
There’s a fly within the ointment, nevertheless.
According to a brand new ValuePenguin survey of 1,000 Americans, almost a 3rd (32%) of shoppers whose journey bank card got here with a sign-up bonus spent greater than they may afford to redeem the perk.
Additionally, 45% of travel-credit-card holders opened their card particularly for the sign-up bonus. And greater than half (54%) of travel-card holders additionally use that card for nontravel bills, ostensibly serving to fund future holidays with rewards.
“Sign-up bonuses are always primary motivators when it comes to consumers choosing and signing up for a new rewards card, which is why so many credit card issuers employ high bonuses to attract new business,” said Sophia Mendel, travel expert at ValuePenguin.
“However, no bonus is worth going into debt over.”
Demand for Travel-Rewards Cards Is High
Consumers are eager to open and use travel-rewards cards, primarily because the pandemic and related lockdowns prevented them from flying for two years.
According to Value Penguin, half (49%) of consumers say they may apply for a travel-rewards credit card in the next six months.
That figure is nearly two-thirds (64%) for younger Americans (Gen Z, ages 18 to 25 and Millennials, ages 26 to 41) and more than half (56%) for six-figure earners, the study reported.
“Travel costs are hovering with inflation, and folks wish to begin incomes factors they will use to journey with their on a regular basis bank card spending,” Mendel mentioned.
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“Many journey bank cards are additionally providing stellar sign-up bonuses to encourage individuals to open a brand new card and earn factors they will use to journey no matter excessive costs.”
Rewards Cards Structured to Spur Holders to Spend
Credit-card companies know that by offering perks, including travel rewards, they’re encouraging cardholders to spend money.
“The relationship between signup bonuses and possible overspending relative to what a consumer has budgeted is due to not consciously planning for how to meet a signup bonus,” said Julia Menez, founder of the Geobreeze Travel podcast.
Sometimes, a consumer will sign up for a credit card that has a $3,000 minimum spend in three months. But two months after they open the card, they realize they have spent only $2,000 and have no other planned purchases.
“At that point, they might panic and buy $1,000 of things they didn’t need from Amazon (AMZN) – Get Amazon.com Inc. Report just to meet the minimum spend, Menez said.
“They’ve obviously done the research and found that people spend more when they’re working towards perks,” said Jay Zigmont, a certified financial planner and founder of Childfree Wealth in Mississippi. “The first time you have to pay an annual fee, or interest, chances are the perks have lost most if not all of their value.”
“They know that the gamification of purchasing will drive you to spend money,” Zigmont added. “For most people, it’s an excuse or justification to spend.”
How to Mitigate the Cost of Rewards Cards
What can consumers do to mitigate the cost of travel rewards cards? For starters, never pay an annual fee or another fee to get the rewards.
“Also, look at the fine print and make sure you can actually use the reward,” he said. “Pay off your credit card completely each month and never carry a balance.”
It’s a good suggestion to ensure you’re in a spot to repay the bank card invoice in full every month. “Otherwise, the balance transfer fees or interest payments will negate the value you earn from the points,” Menez mentioned.
Additionally, have a plan to satisfy the minimal spend via bills you had been going to make anyway.
“Make sure you have enough in your checking account to cover the minimum spend before applying for the card,” Menez added.
Source: www.thestreet.com”