Updated on 01.11.17

When Credit Card Rewards Become Dangerous

As a credit card rewards expert and frequent traveler, I like to stay on top of the changes in the rewards industry. As part of the process, I belong to several online travel forums where people connect to share trip ideas and rewards strategies.

Most of the time, these forums are fun. But sometimes, they show that there’s another side to credit card rewards most people never see – a dangerous side. Where smart rewards enthusiasts use credit card rewards to get free travel or help save on trips they can actually afford, there are also people who jeopardize their financial lives to rack up rewards.

Case in point: A few weeks ago, a woman posted a truly perplexing query in a travel forum I belong to. She had just signed up for the American Express Platinum card and needed to spend $10,000 in three months to earn a huge 100,000-point signup bonus. Her solution? She wanted to know if she could charge $10,000 at the casino, then gamble the night away.

Shocked at how bad an idea this was, I replied to say you should never gamble on credit. Unfortunately, my advice fell on deaf ears, because at least 10 other people agreed gambling on credit wasn’t a big deal. They were going to gamble anyway, they argued, so why not earn some rewards in the process? And, who knows? She might even double her initial $10,000 to $20,000, turning a profit on top of her 100,000 Membership Rewards points. At least, that’s what she argued.

Of course, I countered with the argument that she could just as well lose $10,000. What then? Instead of responding, she just deleted the entire comment thread altogether.

When Credit Card Rewards Become Dangerous

Unfortunately, we all know this type of thing happens all the time. While I’m not sure she would even earn rewards on funds charged at a casino (wouldn’t the money count as a cash advance?), that’s not even the point. If she gambled and lost, she would owe $10,000 and have nothing to show for it – except, of course, a $10,000 credit card bill to pay.

Of course, gambling isn’t the only way chasing rewards can become self-defeating. Through reading forums and talking with other people, I’ve found there are literally hundreds of ways people get themselves – and their families – into trouble pursuing rewards and signup bonuses. Here are a few of the most common:

Dangerous Rewards Move #1: Pursuing Too Many Signup Bonuses at Once

Most rewards credit cards offer a signup bonus after you meet a minimum spending requirement within a span of three or four months (e.g., earn 50,000 points after you spend $4,000 in 90 days). While one signup bonus may be easily managed depending on a person’s normal spending patterns, trying to fulfill more than one at once can prove fatal to your finances.

This is exactly what happened to a woman who shared her story in a different travel forum I belong to. She had signed up for too many cards at once, she said, and needed to find a way to spend $15,000 in three months to earn all the bonuses. She was asking family members if they would let her pay her bills, she said, but also considering making an online loan just to meet the requirements. Scary stuff, indeed.

Dangerous Rewards Move #2: Spending More to Earn More

Enticing rewards offers usually require big spending requirements. And the more you spend, the more you earn. Some cards even offer extra “bonus” points for shopping at specific stores or brands. Usually, you’ll get somewhere between two and 10 extra points per dollar spent, which makes racking up a huge bill seem super lucrative. Right?

Unfortunately, earning more rewards doesn’t mean you’re saving money at all. If you’re paying $50 more to buy a computer at a certain store to earn rewards, for example, you need to make sure the extra rewards you’re racking up are worth more than $50.

Far too many people never do the math, and wind up overpaying for items just to eke out a few extra points. While overspending may not be dangerous in itself, the cumulative effect of overspending across many years can be devastating.

Dangerous Rewards Move #3: Getting into Debt to Earn Rewards

The combination of minimum spending requirements with huge signup bonuses is too much for some people to handle. I know one lady who signed up for a rewards card on a whim, only to turn around and charge a new set of living room furniture the day after she received it in the mail.

She wasn’t planning on buying new furniture, she told me, but she needed to spend $4,000 in 90 days and figured “what the heck.” But the bad news doesn’t stop there. Not only did she spend nearly $4,000 on a purchase she wasn’t even planning to make, but she didn’t have the cash to pay it off, either. So now she owed $3,800 at a 19.8% APR. Her plan was to make the minimum monthly payment for a while, then use her tax refund check to pay it all off in the spring.

Even assuming she paid the whole thing off within nine months – without adding to the balance – she’d be stuck paying about $300 in interest on something she wasn’t even planning to buy in the first place. Some signup bonus.

Dangerous Rewards Move #4: Taking Chances with Your Credit

While signing up for a rewards card or two may not make a huge difference to your credit score, signing up for too many cards – or racking up huge balances on them – can drastically affect your score over time. Under the common FICO scoring method, new credit makes up 10% of your credit score (in a negative way), while the length of your credit history makes up 15% (the longer the better). Each time you open a new credit card, a hard inquiry is recorded on your credit report as “new credit.” And with each new account, the average length of your credit history shortens.

To top it all off, the amount of available credit you’ve used up accounts for 30% of your score, so carrying big balances — like those used to meet a signup bonus — can cause your score to sink as well.

All of these details combined mean that pursuing too many rewards cards and bonuses at once can mess up your credit score – at least temporarily.

While a so-so credit score may not seem like a big deal, it could cost you thousands of dollars if you need a loan to buy a house or finance a car. With excellent credit, you’ll qualify for the best loans and interest rates possible. With slightly damaged credit, on the other hand, you may qualify for loans with higher interest rates and less attractive terms — or not qualify at all. This is yet another case where pursuing rewards just isn’t worth it.

The Bottom Line

While credit card rewards can make frequent travel easier, certain personality types should steer clear. If you’re bad at math or a compulsive shopper, for example, pursuing credit card rewards could actually leave you worse off – even after you cash in your rewards. And yes, gambling with credit is a terrible idea no matter what a handful of people in a travel forum say. Being willing to lose $10,000 at a casino to earn 100,000 Membership Rewards points worth around $1,500 is not only foolhardy – but dangerous as well.

Before you pursue credit card rewards, you should make sure you have a plan in place to handle the intricacies of the hobby. Having a monthly budget you live by definitely helps, as does tracking your spending on a regular basis.

While credit card rewards can add some excitement to your spending, they aren’t worth going into debt, spending more than you can afford, or wrecking your credit.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.

Related:

Have you ever gotten into trouble with credit card rewards? Do you know anyone who has?

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