Credit cards

Is it risky to juggle multiple credit cards for rewards? 3 Disadvantages of Playing the Rewards Game

Dubai: Credit card rewards programs come with a seemingly endless variety of perks and point systems, but for some who rush into the credit card rewards game, the repercussions can be durable.

While credit cards are fantastic for earning rewards, the rewards are quickly canceled, for example, if you pay a high interest rate on the balance. Having a balance on multiple credit cards can be difficult if, no matter how hard you repay, you don’t seem to be making any progress.

Also, some cards charge hundreds of dirhams in annual fees but offer a plethora of perks such as free hotel upgrades, airport lounge access, ticket discounts. So, when weighing the benefits and risks of a rewards program, be aware that an annual fee can also reduce the relatively small percentage return.

For example, if you pay Dh100 per year to get 1% cashback, for example, you would have to spend Dh10,000 to recover the annual fee. On the other hand, if you need or want that particular card and are going to charge money on it regardless, the 1%, or more, can be a nice bonus.

Thus, the potential for further debt is one of the main pitfalls of credit card rewards, and although some of your credit card debt is the result of emergency spending, it is inevitable that some of it also comes from poor planning.

Risk #1: Credit Card Rewards Can Make You Spend More: Research

While many people who seek credit card rewards say that using credit doesn’t change spending habits, some research suggests that some spending habits do change quite a bit. A 2008 study noted that the immediacy of cash payment affected people differently from the delayed consequences of credit payment.

In an excerpt published in a reputable psychology journal, the argument was “the more transparent the flow of payment, the greater the aversion to spending or the greater the ‘pain of paying’…leading to payment methods less transparent such as credit cards and gift cards (compared to cash) being more easily spent.

In other words, credit cards lessen the pain of paying. They do this by delaying the time in which you have to pay your bill and allowing you to mix up your purchases in such a way that you forget exactly what you are buying.

If you sign up for a bunch of rewards cards and don’t know if you can use them like you would cash, you may regret to find that you’re someone who overspends with credit. This can be expensive, but you can minimize the damage by taking time with reward cards and using them sparingly at first.

If you sign up for a bunch of rewards cards and don’t know if you can use them like you would cash, you may regret to find that you’re someone who overspends with credit.

Risk #2: Juggling too many new cards can lead to reckless spending

One of the biggest drivers of rewards card sign-ups is the upfront bonuses they offer. Many cards offer hundreds of dirhams in cash back or travel credit to spend a specific amount of money in a few months (eg 3,000 dirhams in three months).

These bonuses can be lucrative, but they can also cause people to overspend to meet the minimum spend requirement. Juggling too many new cards at once can also put you in a position where you have to spend more to earn each of the bonuses you seek.

If, for example, you signed up for three cards that required you to spend Dh3,000 in three months to earn the bonus, you would be required to spend Dh9,000 at a time. Although you can achieve this without jeopardizing your financial health, it may not be the case.

So it’s best to look for one bonus at a time and make sure you can naturally meet all spending thresholds with regular purchases such as groceries, fuel, insurance, and utilities. After all, you’re unlikely to buy things you don’t need to earn a sign-up bonus on your credit card.

Risk #3: Multiple New Credit Card Applications Can Hurt Your Credit Score

Another reason to approach credit card rewards with caution is the fact that getting too many credit cards at once can actually hurt your credit score. Each credit card application will prompt the bank to “investigate” your credit report to assess your creditworthiness.

These inquiries or checks are listed on your credit file and are also visible to other lenders. Multiple credit applications not only signal desperation on the part of the borrower, but they will also put you in a higher risk category. That’s why each additional credit application will lower your credit score.

So, new credit cards can lead credit reporting agencies to believe you pose a greater risk, and they can lower your score as a result. But as long as you’re not over-leveraged and are able to meet your monthly repayment schedule, you shouldn’t have too much to worry about.

In addition to new credit, the length of your credit history is also part of your credit score. Since getting new cards will cause your average credit score to drop, this is another factor that can hurt your credit in the short term.

Credit card

New credit cards can lead credit reporting agencies to believe you pose a greater risk, and they can lower your score accordingly.

Key Point: It takes time to develop good credit habits, so choose rewards cards wisely

Why stick to just one rewards credit card if you can combine them to increase your net rewards? You can choose to use one card for one type of purchase and a completely different card for other types of purchases.

Because different cards often offer different rates of return for each spending category. By smartly allocating your spend, you maximize your rewards by enjoying increased rewards on all of your purchases, not just some of them. Logical isn’t it?

But figuring out which rewards card is right for you takes time, so rushing around and racking up cards doesn’t help. Experts also report that it takes time to develop positive financial habits, including the ability to use credit responsibly.

So if you jump into multiple rewards credit cards too soon, you could find yourself in the middle of a problem you don’t know how to fix. Knowing your spending habits, planning your application, and negotiating to waive the annual fee are all ways to maximize your rewards.

The best way to use credit cards is in conjunction with a monthly budget. You can charge for your purchases each month to earn rewards, but you should have cash on hand to pay your bills since the average credit card interest rate is over 16%.

It also helps build an emergency fund that you can use to cover unexpected expenses or fill in the gaps if your income drops for some reason. If you use credit without a plan, you could live to regret it and end up in debt for a long, long time.