Rewards cards, when used properly, can be a great spending tool -- who doesn't love the idea of earning miles, points or cash back for their purchases? The truth is, rewards credit cards aren't for everyone, and it's important to really do your homework before applying for one of these credit cards. Here are five reasons why a rewards credit card might not belong in your wallet right now.
You've had a spending problem in the past
If you were a problem spender in a former life, rewards credit cards might be something you need to avoid. Several recent studies have proven that, in some cases, using credit instead of cash actually causes people to spend more money, and unfortunately, the pursuit of cash-back rebates might just be enough to sabotage any progress you've made. If that's the case, Beverly Harzog, credit card expert and author of "Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made," suggests a hands-off approach to credit card rewards.
"If you're a person who tends to spend more than necessary when you're using rewards cards, they aren't a good choice for you," said Harzog. "You can't benefit from the rewards if you're overspending. In fact, you could end up in credit card debt."
You're carrying a balance on an existing card
Paying interest on a credit card while vying for rewards makes little to no sense, says John Ulzheimer, credit expert at CreditSesame. Why? Because the interest you're paying is likely wiping out any rewards you're "earning."
"You're paying interest on your debt, which means you're funding your own rewards and that defeats the purpose," says Ulzheimer.
In other words, until you're debt free, you should forgo rewards cards altogether.
You don't track your spending
Not tracking your spending can also be a recipe for disaster if you're pursuing rewards, as it takes some extra work and organization on your part, if only to keep it all straight and make sure that you're not overspending.
"If you find yourself scratching your head at the end of the month trying to figure out why your balance is so high, it likely means you're overusing the card to chase the rewards, which also defeats the purpose," he says. "Rewards programs are best suited for people who use their cards for normal purchases and then pay them off at the end of the month."
You're trying to rebuild your credit
Credit card rewards may also represent a raw deal for people trying to rebuild their credit, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling (NFCC). Since applying for a new credit card results in a hard inquiry on your credit report, the effects of multiple inquiries can take their toll over time. And as Cunningham says, bad credit habits coupled with credit utilization (how much you owe relative to your line of credit) above 30 percent could lead to a lower credit score.
In other words, if you're trying to rebuild or improve your credit score, signing up for new credit cards isn't the greatest idea.
You're buying a home or applying for a loan in the near future
Speaking of all those hard inquiries, if you're planning on buying a home or taking out a large loan in the near future, you might think twice about applying for any type of credit card, rewards or otherwise. Since too many hard inquiries can cause your credit score to dip, albeit temporarily, your new rewards cards could theoretically cause you to pay a higher interest rate on your loan.
To avoid that sticky situation, focus on doing things to improve your credit instead. Create a budget and learn to track your spending. Also, take special care to pay all of your bills in full and on time. Then, in the future, you'll be ready to benefit from rewards cards without all of the risk. Get your free credit score at WisePiggy.com if you want to see where you stand today.
Earning rewards without the risk or the cards
If any of these red flags apply to your situation, make sure to think long and hard before signing up for any new rewards card. Ask yourself if what you have to gain is really worth any potential losses, and how your actions today could affect your financial situation in the future.
There are also plenty of ways to make financial strides without using credit cards (or rewards) as a crutch. People who are likely to struggle with rewards cards "would be better off tracking their spending and creating a budget that allows them to save money to meet their specific goals," says Cunningham.
For example, learning to save more of your income could free up more cash to spend on things you would've used credit card rewards to buy in the first place. In a sense, you'll be creating your own rewards that way, just without all the risk. Even better, you can use the opportunity to show your children how profitable it can be to make good financial choices.
And just because you're not in a position to pursue rewards now, doesn't mean it will always be that way.
"There's a possibility that you can take control of your financial life and benefit from rewards cards in the future," says Harzog. "It's important, though, to make sure you're ready."