Are You in the Know on Credit Card Fees and Rewards?
NerdWallet finds Americans aren’t savvy about checking fees and reward programs.
Statistics show people rarely take time to familiarize themselves with a new product that they purchased before they start using it. That urge to pull a new toy out of the box and start playing with it is just too great to be bothered with something boring like a Use & Care Manual. That may explain why studies find that 95% of all gadgets returned actually worked in spite of what the user thought.
The scary truth is that credit users are no more likely to read a credit card agreement or even the initial contract closely, any more than tech users read the user manual for a new toy. That’s according to new online survey from the financial statistics experts at NerdWallet. The study finds people “either don’t understand credit card fees and rewards or don’t consider them when choosing a card.”
Not familiar with credit card fees
Roughly one third (30%) of survey respondents reported being confused by credit card fees. However, beyond basic confusion, there was also a tendency not to pay attention to fees. For example, 41% of respondents didn’t consider the cost of foreign transactions or cash advance fees with applying for a new card.
In fact, the only fee most cardholders usually bother to check is the annual fee. The survey found 87% of borrowers care about the annual fee when they apply for a new card, but less than half of those borrowers get past the annual fee to consider others. As NerdWallet shows, that can be a big deal in the bottom lines of cardholders.
Consider a cash advance where you use a credit card to draw out money at an ATM. Most cards have a one-time cash advance fee of 4.5% of the total amount taken out. Additionally, the interest charges on that amount are factored using a higher APR than the APR used on regular purchase transactions. Cash advance APR averages 25.8% compared to the average 19.97% APR for purchases. So the cost of a cash advance is high and may not be worth it once all of the fees and interest charges are factored in.
Making rewards truly rewarding
Although 73% of survey respondents felt rewards were one of the most important factors when considering a new credit card, nearly one third say they don’t really fully understand how to earn rewards. Additionally, nearly one fifth couldn’t explain the dollar value of rewards earned.
This lack of understanding on how reward programs work mean borrowers may not be earning as much of a reward as they think they do when they make a purchase on a rewards credit card.
“Consider that average credit APR is over 19% but the cash-back value on most credit cards is capped at 5%,” explains Gary Herman, President of Consolidated Credit. “If you start a month with anything above a zero balance, then interest charges are applied during that billing cycle. So you earn 5% cash back, but finance charges of 19% mean that the debt costs more than the rewards you earn. It’s just not worth it.”
Additionally, Herman also notes people often squander airline miles in the same way. Flier miles usually have an average value of 1-2 cents. Most programs require you to use 25,000 miles, at minimum, to purchase a basic ticket. So it only makes sense to use miles to purchase tickets over $250-$500, depending on the value of your miles specifically. But if you’re using miles to pay for a $150 ticket, then you’re actually losing out.