Gaming credit-card rewards to score the best perks and free trips has become a popular hobby among many consumers these days.
But a new study from personal-finance website NerdWallet shows how many misconceptions people have about these rewards programs, which could be setting them up for serious disappointment — or worse. As a result, many consumers would likely be better off waiting to pull the trigger on these offers until they understand these cards fully. NerdWallet’s report was based on a survey of more than 2,000 Americans.
Here is what the study found:
Two in five people believe carrying a balance won’t affect the value of rewards
Carrying a balance on a credit card has no bearing on the rewards the card holder will receive for their spending. However, the interest accrued by maintaining a balance can easily outweigh any benefits gleaned through the rewards program. “Going into debt to earn travel rewards defeats the purpose of rewards in the first place,” said Sara Rathner, NerdWallet’s credit-cards expert.
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“Making high-interest credit-card payments on expenses you couldn’t afford cuts into the value of the rewards you’ve earned and may end up costing you money,” she said.
As NerdWallet explains, a consumer who makes a $100 purchase on a card that rewards 2% back in points or miles would earn $2-worth of rewards on average. But if they carry that balance for two months and the card charges an annual percentage rate of 15%, they’d owe $2.50 in interest. And that’s below the average APR most cards charge: 17.67% as of April 3, according to CreditCards.com.
Many Americans don’t know how much points or miles are really worth
Popular travel-oriented credit cards like the Chase Sapphire Card JPM, +0.10% or the Capital One Venture Card COF, +0.20% provide consumers with points or airline miles every time they make a purchase with their card.
Nearly 1 in 5 consumers think a reward point or mile is worth $1 or more.
Each program values these rewards differently. In some cases, points or miles might have different values within a single credit card’s rewards program based on how a consumer redeems them.
And making matter worse: Many consumers are overestimating how much their points or miles are worth. On average, a single credit-card point or mile is worth 1 cent. But nearly half (45%) of card holders think they’re worth more than that — around 18% of consumers believe that a point or miles is worth $1 or more.
Moreover, 11% of Americans said they don’t think points or miles have any dollar value at all, while 26% said they weren’t sure of how much they’re worth.
Younger consumers are more likely to overestimate sign-up bonuses
Roughly one-quarter of Generation Z (23%) and millennial (21%) consumers said they believe that a 50,000 point or mile sign-up bonus could pay for three or more round-trip flights. In reality, the typical sign-up bonus pays for 1.6 round-trip domestic flights, on average.
That figure, however, doesn’t take into account the points or miles that will also be earned through the spending needed to earn the bonus.
‘Stockpiling travel rewards and letting them collect dust in your account is pointless.’ —Sara Rathner, NerdWallet’s credit cards expert
Overall, 11% of consumers believed that sign-up bonuses would provide a card holder with enough points for three or more round-trip flights.
Others underestimated the value of such awards: 16% believed that sign-up bonuses wouldn’t be able to pay for any round-trip flights. And one-fifth of the people surveyed had no idea of how many flights the bonus could pay for.
Less than half of consumers would use credit card points for flights
As many Capital One card holders likely learned this month, the different redemption options for rewards points or miles aren’t all created equally.
Many cards’ rewards programs offer consumers the best bang for their buck when they apply their points or miles towards an airfare purchase. Only 40% of consumers, however, said they would use their rewards earned through a sign-up bonus for flights.
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Meanwhile, 13% of consumers said they would use the rewards earned for expenses not related to travel. Many travel cards offer worse redemption rates for other purchases or cash-back than for travel-related expenses.
Also worrying: 13% of people reported that they wouldn’t spend rewards they initially earned and would, instead, save them. But card issuers often will change up how much points or miles are worth and, in most cases, that means they’re worth far less.
“Stockpiling travel rewards and letting them collect dust in your account is pointless,” Rathner said. “Travel rewards are designed to help you do just that — travel — and only have value when they’re actually used.”
