Isn’t it ok to keep a credit card that earns points, cash back, or store discounts?

Article by R. Joseph Ritter, Jr. CFP® EA

Many credit cards today offer rewards in cash back and points that can be applied toward future rewards. Until I canceled it, my favorite card was the card that earned Holiday Inn points which entitled me to free rooms.  This is nothing more than a gimmick to get customers to use the credit card. Why?

Credit card companies make a significant amount of money on transaction fees.  Each time you swipe your card to pay for a purchase, the retailer has to pay the credit card company 2%, 3% or more of the total amount of the transaction for the privilege of accepting credit cards. Obviously, this cost is built into the cost of the items you are purchasing, whether you pay with a credit card or not.  Some retailers, such as gas stations, are now offering price discounts if you pay with the store brand card or cash.

In my experience, however, the rewards are only good if you do not incur any late fees, interest, annual fees or other penalty fees.  In the amount of time it took for me to earn one night free at Holiday Inn, I could easily incur one late fee because of a misplaced statement, and the benefit of the reward is suddenly greatly reduced or even eliminated.  The same is true with store discounts if you pay with the store brand credit card.  One fee or several months with interest charges eliminate the discount and entirely defeat the purpose of using the credit card for points in the first place. Credit card companies hope you never learn this because that is how they make money.

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