Credit card rewards programs can be a fantastic option for anyone looking to save on future travel, earn cash back on everyday purchases, or even earn premium benefits like elite status with their favorite hotel or airline. The allure of these rewards lies in the potential to receive valuable perks simply by using the credit card for everyday spending.

However, the impact of high fees associated with some cards can significantly diminish the value for consumers. Annual fees, foreign transaction fees, balance transfer fees, and high interest rates can eat into the rewards earned, especially if cardholders carry a balance or fail to use the card frequently enough to justify the fees. This is why financial literacy is so important—you need to understand the terms and conditions of any financial product you use.

For some, the allure of rewards may cause them to overlook or underestimate the impact of these fees, resulting in unexpected costs that outweigh the benefits of the rewards program. This has become a hot debate recently, with some politicians and government agencies arguing that we need a complete overhaul of the system. Advocates disagree, but it seems some changes will happen regardless.

Understanding credit card rewards and fees

There are several credit card rewards, so it’s important to understand which one you have and its associated fees. Luckily, there are cards tailored to just about any consumer, so you can choose which card to apply for based on your preferences and spending habits. Here’s a brief overview of the most common types:

1. Cash back credit cards: These cards offer a percentage of the amount spent back to the cardholder as cash rewards. Cash back cards could be the way to go if you prefer simplicity and tangible benefits. Some cards will have a flat rate of cash back earned, while others will have a tiered earning system. For example, you might earn 5% cash back in one category, 3% in another, and 1% back on all other purchases. The Wells Fargo Active Cash is a great choice, allowing you to earn a flat 2% cash back on all purchases.

2. Co-branded credit cards: These cards accumulate points or miles for every dollar spent, which can then be redeemed with the co-branded airline or hotel partner. They appeal to frequent travelers who can accumulate points quickly and use them for flights, hotel stays, or upgrades. There are some limitations, though—you can often only redeem your points and miles with the co-branded company. For instance, if you have a Delta SkyMiles credit card, you can only use your SkyMiles on Delta flights.

3. General travel rewards cards: Similar to co-branded cards, general travel rewards credit cards earn points or miles for every dollar spent, typically with a focus on travel-related expenses. These miles can be redeemed for flights, hotel stays, rental cars, and other travel expenses by booking through the card’s travel portal or by transferring to a travel partner. For reference, this category includes a card like the new Wells Fargo Autograph Journey, which earns five points per dollar on hotels, four points per dollar on flights, three points per dollar on restaurants and other travel, and one point on all other purchases. Premium cards with higher annual fees might include perks like airport lounge access, travel insurance, and more. These cards are for jet setters and business travelers who value convenience, comfort, and travel perks.

4. Retail Rewards credit cards: Issued by specific retailers, these cards offer rewards, discounts, or special financing options when used for purchases at the respective retailer. Retail rewards cards are good for loyal customers who frequently shop at a particular store and want to earn rewards or access exclusive discounts. It’s important to keep in mind that these cards often have higher interest rates than travel cards.

5. Student credit cards: Geared towards college students and young adults, these cards often have lower credit limits and fewer rewards but can help establish a credit history. They typically offer perks like cash back on purchases relevant to students, such as groceries and dining. You can switch to a regular credit card once you’ve graduated and established a good credit score. These categories can overlap, like in the Discover it Student Cash Back. It’s a cash back card, but it’s specifically for students.

6. Secured credit cards: Designed for individuals with limited or poor credit history, secured credit cards require a security deposit that serves as collateral. They offer the opportunity to build or rebuild credit by making on-time payments, which can eventually lead to an upgrade to an unsecured credit card with better terms and rewards.

Pitfalls of high fees

High fees associated with credit cards can significantly diminish the value of rewards, particularly for consumers who carry balances or don’t fully utilize rewards programs. Even if you take advantage of all the benefits, you might not be saving enough to justify an annual fee. Some cards have better benefits than others; not every card will be worth it.

While rewards can offer enticing perks, the annual fees and potentially high interest rates can quickly erode these benefits. If you carry a balance from month to month, interest charges can quickly accumulate and offset any rewards earned, potentially resulting in a net loss. If you have a big purchase you need to make that you need some time to pay off, consider applying for a card with an intro low APR period.

If you don’t fully engage with your card’s rewards programs, you may find yourself paying annual fees for benefits you rarely use. For instance, I was a cardholder of the Delta SkyMiles Platinum card and realized I didn’t use my annual companion pass as often as I should, which was a primary perk of the card.

This has become a topic of national debate in recent months, with the Biden Administration raising concerns about credit cards and their benefits. They argue that cardholders could be losing money with their credit cards, point values are difficult to determine, and issues with redeeming rewards continue to crop up. There have been complaints about the ability to actually book a flight with points earned from co-branded credit cards.

Regulatory changes and consumer protection

The Department of Transportation and the Consumer Financial Protection Bureau (CFPB) recently held a joint hearing to explore possible regulatory changes to protect consumers. The CFPB found issues like limited redemption options and devalued rewards. Some argue that rewards are essential for consumers, but critics point to challenges like dynamic pricing systems that affect reward values.

There’s likely truth on both sides, so we will have to meet somewhere in the middle. I love travel rewards, but it might not hurt to make things a bit more clear. While regulatory changes aren’t immediate, agencies have announced they are reviewing options to protect consumers’ interests and ensure more explicit reward values.

Even outside of credit card-specific changes, the DOT seems devoted to making travel better for consumers. They now require airlines to offer travelers refunds if their flight is canceled or significantly changed. This is a huge win for travelers and closely resembles European laws.

If regulatory changes occur, they will directly impact the way consumers handle credit cards and rewards. Clear disclosures mean consumers can make more informed decisions about which credit card best fits their needs without worrying about hidden fees or misleading terms clouding their judgment. When regulations crack down on unfair practices like excessive fees or deceptive advertising, consumers can trust that they’re not being taken for a ride. And when they’re redeeming their rewards, they know exactly what value they are getting and don’t have to worry it’ll change in the blink of an eye.

Evaluating credit card options

Before you apply for a credit card, you need to learn how to evaluate your options. To help you navigate future changes, here are a few tips on how to evaluate credit cards:

  • Understand spending habits: Look at your spending patterns from the past few months to determine which categories you spend the most on, like groceries, dining, travel, or entertainment. Choose a credit card with rewards or bonuses aligned with your spending habits to maximize benefits.
  • Consider financial goals: Determine your financial goals, whether saving money on everyday purchases, earning travel rewards for vacations, building credit history, or consolidating debt.
  • Evaluate fee structures: Carefully review the fee structures of credit cards, including annual fees, foreign transaction fees, balance transfer fees, and late payment fees.
  • Compare interest rates: Compare the interest rates of different credit cards, especially if you anticipate carrying a balance. Choose a card with a competitive interest rate to minimize interest charges if you cannot pay off the balance in full each month.
  • Assess rewards programs: Evaluate the rewards programs offered by credit cards, including cash back, points, or miles. Consider factors like redemption options, transfer partners, earning rates, expiration dates, and any limitations or restrictions on rewards.
  • Review additional benefits: Look beyond rewards and consider additional benefits offered by credit cards, like travel insurance, purchase protection, extended warranties, airport lounge access, or concierge services. Figure out if you will actually use these perks, rather than being impressed by the offering itself. You should also look at which credit cards you already have to ensure you aren’t repeating some of the same benefits.

Ultimately, the most important thing is doing your research. Pay attention to any promotional periods, introductory offers, and changes in terms that may affect the card’s overall value over time. A lot can hide in the fine print, so it’s best to look things over before adding a new card to your wallet.

There’s nothing wrong with getting a card with a high annual fee—a card with high rewards and benefits may justify a higher annual fee if you utilize those rewards frequently. If not, it’s best to get a card with a lower annual fee but without all the unnecessary perks.

Bottom line

Assessing rewards programs against associated fees and interest rates is crucial, ensuring they align with your spending habits and financial goals. Keep an eye on any regulatory changes that might be on the horizon in the coming months or years, as they can impact terms, fees, and rewards programs. The landscape is constantly changing, so it’s best to stay alert.