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The pros and cons of credit card rewards

The pros and cons of credit card rewards

By Tom Murray, Stephanie Graham. CREATED Aug 22, 2013

MILWAUKEE - While being treated for lyme disease, Cheryl Laughlin had a gem of an idea -- to start her own jewelry business.  There was just one problem.  She recalls, "I was only doing freelance work at the time, so I was just racking up the medical bills."

Cheryl's bills were in the thousands, making it tough to kickstart her start-up.

"I really needed a way to, you know, pay them with a credit card and kind of float them for a while until I could get regular work or regular business," Cheryl says.

In the wake of the financial crisis, consumers like Cheryl are cautiously using plastic again, while remaining focused on paying down debt.

Greg McBride with bankrate.com says credit card issuers have taken notice, luring high-risk customers with attractive offers that go beyond slashed fees and 0% introductory rates.

"Credit card issuers, they don't issue a card that's designed to be a one size fits all for everybody.  Instead, they issue a variety of different cards, each one targeted to a specific type of consumer," McBride explains.

The latest trend is rewarding consumers who pay on-time, or pay more than the minimum.  Perks include cash back or interest rate rebates.  Joe Ridout with Consumer Action says while these carrots, so to speak, provide incentive to pay down debt.  "If you carry a balance even a couple of times a year, the interest you're going to pay on a rewards card, which is always going to be higher, that will generally outstrip whatever rewards you're building up."

If you have trouble paying your monthly bill, there are now credit cards that will spare you late fees and penalties. That is the type of card Cheryl went for.

"Since I was using that card to start up all the research and development, I didn't have to worry, oops, it's been sitting there for a week too long," Cheryl says.

Ridout warns consumers - don't wait longer than 30 days to pay up.  "Unfortunately a late payment very likely will still be reported to the credit bureaus. It very likely will take down your credit score."

To make the most of the card you choose, experts recommend you:
-Evaluate its incentives.
-Pay off your debt before any interest free period is up.
-Focus on paying your balance in full each month.

"That will do two things. It will keep you out of debt but it will also help establish a strong credit history," McBride says.

Cheryl will soon be debt free and her business is thriving. She credits her credit card for the success.

"You just don't want to be sitting around waiting to start your business, so when it showed up it was perfect timing," Cheryl beams.

One more thing to keep in mind - cards that reward good financial behavior still charge a fee if your monthly payment is late. If you're more than 60 days delinquent, your APR could take a big hit.