While graduating to a rewards credit card can be a smart goal to pursue when you're adequately prepared, it's a move that shouldn't be taken lightly. Although different types of rewards credit cards offer cash back, travel points, and other special benefits for cardholders, they often charge higher interest rates to compensate. As a result, a rewards credit card can become expensive if you use it the wrong way.
Before you opt for a rewards credit card instead of a low interest credit card, it's wise to evaluate your financial situation and make sure you're in the right place – both financially and emotionally.
4 Signs You're Actually Ready for a Rewards Credit Card
Here are four rules to apply to your finances before you take the plunge into the world of credit card rewards:
You already know how much you spend each month
Using a rewards credit card is a smart way to rack up points you can redeem for gift cards, cash back, travel, and more. But before you sign up for a new card, you should have a good idea of how much you are spending each month.
Several studies performed over the years have shown that credit cards sometimes cause people to spend more money than they would otherwise. By knowing how much you normally spend, you can ease into your new credit card with a general idea of how you'll use it. Remember, a rewards card can only benefit you if you don't spend more than you can afford.
You use a budget
The best way to use any type of credit card is as a companion to a written budget. By living with a written budget, you can make sure your credit card spending aligns with both your short-term and long-term goals.
Setting limits on your spending and using credit only in conjunction with those limits is the smartest way to stay on track. With a budget, you'll always know how much you can spend in each of your budget categories.
You are paying all of your bills in full – every single month
Since rewards credit cards tend to charge higher interest rates, it's crucial that you never carry a balance as you pursue rewards. That's why you shouldn't consider signing up for a rewards credit card until you're in the habit of paying all of your bills in full and on time.
A debt-free lifestyle is essential if you want to use rewards to your advantage. By starting the process only when you're debt-free, you can make sure you already have the positive credit habits required to avoid getting into debt.
You have good or excellent credit
Most of the top rewards credit cards require good or excellent credit, which is generally considered any FICO score over 720. If your credit score isn't high enough to qualify for a rewards credit card yet, you might be better off using a low interest credit card or traditional credit card for the time being.
We suggest getting your free credit score from LendingTree to see "where you're at" and also whether you are in the position to apply for a rewards credit card in the first place. If your score is still relatively low, take it as a sign that you have work to do before you apply for a rewards card.
Rewards credit cards aren't for everyone – and especially not for people who are already in debt. The fact that rewards cards carry high interest rates means that people who carry a balance would like "pay in" a lot more than they received in rewards.
The best candidate for a rewards credit card is someone who is debt-free and absolutely determined to stay that way. The rewards you can earn with cash back and travel cards might be calling your name, but you'll be better off if you wait until you're ready.