If You’re in Credit Card Debt, Forget About Rewards

Credit card rewards can be a nice perk on your everyday spending, but some Americans may be losing them to credit card interest charges. According to a new NerdWallet survey of more than 2,000 U.S. adults, conducted online by The Harris Poll, 21% of Americans have used a credit card to earn rewards in the past 12 months despite having credit card debt.

But here’s the thing: Credit card debt is expensive, and you’re likely spending more on interest than you’re earning on rewards if you’re carrying a balance.

Interest outweighs credit card rewards within months

According to the Federal Reserve Bank of St. Louis, the average interest rate on credit cards assessing interest is 23.37%, as of August 2024. That means that for every $1,000 you’re carrying on your credit card, it’s costing you around $234 a year.

Let’s say you get a new rewards credit card that offers 2% cash back on your spending. You charge $1,000 per month, but only make monthly payments of $500. Your interest would outweigh your rewards in six months. If you were instead spending $1,000 but only making $50 payments, it would only take four months for interest to outweigh rewards.

OK, but what about sign-up bonuses?

About 1 in 6 Americans (16%) opened a new credit card to take advantage of a sign-up bonus in the past 12 months, according to the survey. Sign-up bonuses on credit cards are typically earned by spending a certain amount of money within a set period of time, and they can be worth upwards of hundreds of dollars. But if the cardholders cashing in on these bonuses are carrying a balance, the bonus may not even be worth the effort.

It’s true, a large sign-up bonus will outweigh accrued interest for far longer than ongoing rewards. However, if the point of the sign-up bonus is to use it to get free travel or a chunk of cash back, carrying a balance degrades the value of the sign-up bonus and may eventually outweigh it if you continue to carry revolving debt.

Let’s use the example above and assume a sign-up bonus of $500, which is pretty high. If you spent $1,000 a month and made $500 monthly payments, your interest would outweigh the bonus and ongoing rewards in just 13 months. This would happen even quicker if you were only making minimum payments. And because this sign-up bonus is generous, there’s a good chance the card would come with an annual fee, something we ignored in this illustration for simplicity’s sake.

How to earn (and keep) your rewards

Around a third of Americans (34%) say they’ve strategically used a credit card to accumulate rewards in the past 12 months. Whether you’re trying to earn miles for an upcoming trip or make a little extra cash on purchases you were already going to make, using a credit card for its rewards is a smart move, but only if you can pay off the balance each month.

One tip to avoid running up a balance too high to pay off each month is not using a credit card for spending categories you have trouble reining in. So if you tend to overspend on something specific — clothing, hobby supplies, dining out — try using cash or debit to keep that budget category in check.

If you currently have credit card debt, it’s a good idea to pause spending on cards until it’s paid off. The rewards math very likely won’t work out in your favor anyway, and it’s easier to tackle your debt load if it doesn’t continue to grow.

Methodology

This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from Oct. 1-3, 2024, among 2,090 U.S. adults ages 18 and older. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For this study, the sample data is accurate to within +/- 2.5 percentage points using a 95% confidence level. This credible interval will be wider among subsets of the surveyed population of interest. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact [email protected].

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