4 Hidden Costs Behind Rewards Cards

CreditSoup Staff

Updated On: October 15, 2021  •  4 Minute Read

Credit Cards

There’s no such thing as a free lunch, right? Many credit card companies try to entice customers with rewards such as cash back, free hotel stays, or travel perks — but almost everything comes at a cost.

Those “free” rewards you get simply for using your credit card might not actually be all that free. The most common culprit is hidden fees buried deep within the fine print of credit card applications.

The rewards are sometimes worth the fees and charges, but it’s essential to first understand what you’re paying in fees versus what you’re earning in perks. Here are a few elements to consider when assessing rewards cards:

1. Annual Fees

Annual fees are one of the most common credit card charges, with fees ranging from zero to hundreds of dollars per year. Cards with higher fees often deliver better perks, but you should estimate how much you will be earning in rewards and compare that figure to how much you might pay in fees before you sign up for anything.

The Capital One Venture Rewards Credit Card charges a nominal $95 annual fee, for example, but it offers unlimited travel rewards for airlines, hotels, car rentals, and more. This card could be a smart investment for someone who travels often and can rake in hundreds of dollars’ worth of rewards. If you rarely travel, however, you’ll end up wasting money on perks you’ll never enjoy.

Rate & Fees *Information for this card is not reviewed by or provided by Capital One

2. Free Service Switcheroo

Many credit card companies lure customers in with offers such as zero percent APR, no annual fees, or extra discounts or rewards. Many of these offers are only valid for a few months or a year before they vanish. Suddenly, cardholders are hit with hefty fees they likely didn’t see coming.

Similar to a subscription service that gives you a free trial before sneakily charging you when you forget to cancel, credit cards with free-to-paid fees often give you no warning before charging you after your free period ends.

Before you sign up for that unbelievable deal, read the fine print to see how long an offer lasts. A 0 percent APR that skyrockets to 23 percent after 6 months, for example, could end up costing you more in the long run than a card with a 15 percent APR and no free introductory period.

3. Sign-Up Bonuses

A credit card that will actually pay you money simply for signing up? It sounds like a dream come true. That sudden cash influx can be beneficial, but do your homework before you dive in.

Unfortunately, there’s almost always a catch when it comes to sign-up bonuses. Most of them require you to meet a certain spending threshold within a set amount of time to claim your bonus, such as spending $500 in your first 3 months. Whether or not it’s a good deal will largely hinge on your personal spending habits.

For example, the Barclaycard Arrival Plus® World Elite Mastercard® offers 70,000 bonus miles for cardholders who spend $5,000 on purchases in the first 90 days and paying the annual fee. If you typically spend that much money in a 90-day period, it could be a great perk. If you feel the need to spend more money than usual to reap the reward, it’s not quite as beneficial.

4. Annual Percentage Rate

Rewards cards are notorious for high APRs because credit card companies know people are willing to pay higher interest rates if they’re getting money back. You will want to estimate how much money you will pay in interest compared to what you might earn in rewards to determine whether it’s such a great deal.

Capital One Quicksilver Cash Rewards Credit Card, for instance, offers unlimited 1.5% cash back on all purchases. Cardholders enjoy 0% APR for the first 15 months, though the card’s interest rate rises to anywhere between 19.24% - 29.24% (Variable) after that introductory period; balance transfer fee applies.

If you pay your bills in full each month while using your credit card for everyday purchases, this card could help you earn massive rewards without any concern about rising interest rates. If you typically carry a balance and only use your card for emergencies, you could end up paying high-interest rates without receiving any extra benefits.

Rate & Fees *Information for this card is not reviewed by or provided by Capital One

It’s natural to be tempted by low-interest rates, travel rewards, or free money, but nothing is ever truly free — particularly in the credit world. The rewards often outweigh any associated fees, but only if the card in question matches your spending habits. Do plenty of research ahead of time to ensure you know what you’re getting into. The last thing you want to do is expect a free lunch, only to get saddled with a hefty bill.