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Credit-Card Companies Trick You Into Buying Too Much. Here's How.

TheStreet logo TheStreet 7/25/2022 Brian O'Connell
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Travel-rewards consumers should focus on total costs, not just perks, with their credit cards.

Even as cost-conscious Americans  take steps to save cash, some are driving themselves into deeper financial holes.

Take travel-rewards credit cards, which consumers use to help pay for business travel and vacations. 

On the surface, travel-rewards cards seem like a good deal. You open a card for personal use, pay for goods and services with it, and stack up cash-saving rewards points you can use for your next trip.

There’s a fly in the ointment, however.

According to a new ValuePenguin survey of 1,000 Americans, nearly a third (32%) of consumers whose travel credit card came with a sign-up bonus spent more than they could afford to redeem the perk.

Additionally, 45% of travel-credit-card holders opened their card specifically for the sign-up bonus. And more than half (54%) of travel-card holders also use that card for nontravel expenses, ostensibly helping fund future vacations 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. 


Video: Credit card negotiation (CNBC)

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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 prices are soaring with inflation, and people want to start earning points they can use to travel with their everyday credit card spending," Mendel said. 

"Many travel credit cards are also offering stellar sign-up bonuses to encourage people to open a new card and earn points they can use to travel regardless of high prices." 

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 idea to make sure you’re in a place to pay off the credit card bill in full each month. “Otherwise, the balance transfer fees or interest payments will negate the value you earn from the points,” Menez said.

Additionally, have a plan to meet the minimum spend through expenses you were 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.

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