As politicians wrangle over the budget and debt ceiling in Washington, credit is flowing freely in the world of credit cards. Just a short time ago rewards credit cards offered few incentives, and getting approved for one was for many as likely as winning the lottery. Today, not only is getting a card a lot easier, but the best rewards cards are offering some crazy incentives.
[In Pictures: Celebrities with the Biggest Money Problems.]
Here are a few examples of the latest bonus rewards credit card companies are offering new card members:
These “price wars” among credit card issuers is good news for consumers looking for deals. Virtually all of the major credit card companies are offering incentives for new card members. These rewards, however, do come with a price.
[In Pictures: 10 Affordable Spots for Summer Vacation]
First, rewards cards are very expensive for the retailers that accept them. Retailers that accept credit cards pay what’s called an interchange fee each time a shopper pays with a card, and these fees vary from one credit card to the next. As you might expect, credit cards that pay rich rewards to card members charge retailers the highest fees. Catherine Clifford at CNN recently described how these high fees hit small retailers hard. While consumers do not pay for these fees directly, they surely affect the prices consumers pay.
Second, many rewards cards come with higher interest rates. If you carry a balance from month to month, you could be losing the benefit of the rewards to the interest payments. Notwithstanding these costs, some estimate that up to 70 percent of credit cards in use today are rewards cards.
Rewards credit cards have other pitfalls beyond cost that consumers should keep in mind. First, while bonus cash, miles or points are attractive, it’s important to evaluate the other terms of the card. You don’t want a one-time incentive to lure you to a card that otherwise has mediocre rewards.
[In Pictures: 10 Things You Should Always Buy in Bulk.]
Second, the rewards rules of some cards can be confusing. For example, while some cards offer cash back of up to 5 percent, it is limited to certain categories of purchases that change every three months, and the amount of cash back is capped. Likewise, some points and miles cards value the rewards differently depending on how you use them. So if you are in the market for a rewards card, it is important to read the terms and conditions carefully.
Finally, you’ll want to keep an eye on annual fees. There are many rewards cards that do not charge an annual fee, but some do. Those cards that do charge an annual fee typically offer better bonus rewards and higher rewards each time you use the card. So you’ll need to do a cost-benefit analysis to determine if it’s worth paying the annual fee. For those cards that do charge a fee, they often waive it the first year.