Rewards credit cards can be amazing financial tools, as few products exist that actually pay you to use them. It’s easy to get caught up in trying to earn valuable points, miles and cash back for the kind of spending you would normally make. But behind the thrill of earning rewards are numerous traps that can cause the whole system to unravel. Here are six mistakes you can make with your rewards card and tips for avoiding them.
1. Carrying a Balance
When you pay your entire statement balance in full, then you can avoid racking up interest charges. If you always manage your credit card this way, then the rewards you earn have little cost and your card’s interest rate doesn’t matter. But if you carry a balance, even occasionally, you will likely pay more in interest charges than the value of rewards you receive. If you need to carry a balance, then you should be using a credit card with the lowest possible interest rate, which probably won’t offer rewards. (Not sure what cards are out there? You can check out our roundup of low-interest cards here.)
2. Overspending to Earn Rewards
Because credit cards offer you rewards for your spending, it’s very easy for some people to spend more just to earn rewards. This is a mistake, since any rewards that you earn with even the most generous rewards card will be just a fraction of the cost of the unnecessary purchases you made. Though this fact is obvious, reward card users may still rationalize their unnecessary purchases or be subconsciously influenced by the opportunity to earn points, miles or cash back.
3. Not Understanding Bonus Categories
Many rewards credit cards offer bonuses for specific kinds of purchases. For example, a store credit card will likely offer additional rewards for purchases from the co-branded retailer. But with other cards, the bonuses may not be so simple. For instance, credit cards like Chase Freedom or Discover it may require you to activate your bonus categories each quarter, and some may fail to do so. Other cards like the American Express Everyday Preferred offer bonuses for purchases from supermarkets and gas stations, but only those in the U.S. If you don’t understand these limitations, you may mistakenly choose the wrong card for your needs.
4. Overspending on Annual Fees
When you apply for a rewards credit card, you may feel like the annual fee is a good value. But once you’ve used the card for a year, it’s a good idea to take a critical look at the value that you’ve actually received from the card. For example, you may have a premium travel rewards card that offers a membership to airport business lounges but carries a $450 annual fee. This may have seemed like a worthwhile expense a year ago, but if you’ve only used the lounge a handful of times during the year, then you probably made a mistake.
5. Using an Old Card
You probably haven’t used a cassette player or dial-up modem in a long time. Similarly, some people continue to use the same rewards card they’ve had for many years. The market for rewards credit cards is extremely competitive, and new cards are regularly being introduced that offer increased rewards and more valuable benefits. If you haven’t reexamined your reward credit cards in a few years, then it’s likely that you aren’t earning a competitive rate of return. If you’re considering adding a new rewards card to your wallet, be sure you know where your credit stands before you apply. (You can view two of your free credit scores, updated every 14 days, on Credit.com.)
6. Not Using Your Credit Cards Strategically
It’s easy to just use the same rewards card for all of your purchases, but that could cost you in valuable rewards. Ideally, you may have several credit cards, each for different types of purchases where they earn the most rewards. For instance, you may have one credit card that earns the most rewards at supermarkets, another for gas stations and a third that offers the highest level of rewards for your general spending.
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This article originally appeared on Credit.com.