Loyalty Programs and Credit Card Rewards Carry Risks

To earn a limited-time 500 promotional miles from your mileage “dining club,” you drive six miles out of your way, specifically on a Wednesday, to charge $25 worth of fried chicken on your airlines credit card. You call your loan servicer to see if they’ve started to accept monthly payments by credit card, yet. And, tonight you’re updating all of your online accounts so your future payments default to the right card. You’ve got credit-card-reward-itis, which means you are basing your spending decisions around loyalty programs and credit card rewards incentives.

You’re getting something for nothing, right? So what’s the problem? Here are some of the potential downsides to chasing credit card rewards and participating in loyalty programs.

Some Loyalty Programs Carry Annual fees

Some loyalty programs involving credit card rewards charge an annual fee of $50-$75. Conversely, with good credit, you can get a basic, low-interest rate card with good terms for free. Paying fees for loyalty programs is really only worthwhile if you actually use the rewards points for large purchases like airline tickets. A ticket that would otherwise be $900, could be paid for entirely with frequent flyer reward miles. So, even if you’re out $75, you could benefit.

The key is to take the fees into account before you apply for cards with loyalty programs. This way, you can determine if you’ll be able to earn enough reward points to take advantage of the savings and make the cost worthwhile.

Higher finance charges For those 58% of the population who have a credit card and carry a balance*, they’re likely to pay a higher interest rate on revolving debt than if they used a traditional credit card. Since many cards with loyalty programs come with higher interest rates and fees, it pays to comparison shop carefully when signing up for loyalty programs. Bankrate.com and CreditCards.com offer unbiased comparisons of current credit card terms and conditions.

Spending more Similar to when we run across a bargain, or use credit rather than cash, when we earn credit card rewards points for purchases (or unlock a special “loyalty programs benefit”), we are likely to spend more than we otherwise would have. For those most vulnerable to compulsive spending or somewhat obsessive behavior, using a basic card is less tempting and safer.

Buying things you otherwise wouldn’t Many loyalty programs regularly bombard you cross promotional emails for diners’ clubs, hotel and rental car programs, travel packages and the like. Some consumers may fall prey to the idea they are being offered “special” offers for their membership and that they would be smart to take advantage. Again, these are usually opportunities that, otherwise, they wouldn’t sign up for. Working with a travel agent and using online comparison travel sites will acquaint you with more deals and options, and this will likely save you more money that spending extra for credit card rewards.

Value check Are the incentives worthwhile? At year end, you may receive a catalog from which to shop with your points. But, if the merchandise is poor quality-low-end irons, CD cases or binoculars-the value isn’t worth the annual fee, higher interest rate and temptation for overspending.

If you switch payments to one card, others may be closed If you’ve used only one card to earn maximum credit card rewards points, to reduce their liability, your card issuers may close your other cards for “inactivity.” Credit card issuers have grown increasingly tough on customers who don’t actively use their cards. Not only could these cancellations lower your credit score, they could also do away with a safety net should your primary card be lost, stolen or cancelled. To prevent this problem, keep each card on an automatic monthly charge account such as a gym or online movie rental membership.

Although credit card loyalty programs are beneficial for customers who don’t carry a balance and can resist additional incentives to spend, the rest of us are well advised to avoid the potential pitfalls of participation in such programs.


Clearpoint Credit Counseling Solutions offers no-cost credit and debt counseling from NFCC-certified credit counselors. Our credit counselors can help you develop a plan to discourage overspending and get out of credit card debt. To schedule an appointment, call 800.750.2227 (CCCS) or start immediately online

* Federal Reserve, Survey of Consumer Finances (2007)