Know When — and When Not — to Use a Rewards Credit Card

Putting expenses on a credit card can be rewarding — but only if doing so isn’t driving you deeper into debt.

According to NerdWallet’s annual household debt report, 40% of Americans who are carrying credit card debt from one month to the next say they use credit cards to earn rewards. The problem is, when you have revolving credit card debt, the interest you pay can quickly cancel out the rewards you earn on new spending.

When to use a rewards credit card

A rewards credit card is best used to earn cash back, points or miles on spending you would be doing anyway. Ideally, you would be able to pay your full balance each month, meaning you never incur interest, and the spending wouldn’t keep you from achieving your financial goals.

If you find yourself spending more than you normally would for the sake of earning rewards, or because the credit card gives you more buying power than you would otherwise have, that’s a signal to reevaluate. Consider setting limits on credit card spending, or using cash or debit to keep your budget in check.

Rewards are a nice perk for good financial management. If you plan to spend $100 on groceries regardless, it makes sense to put that amount on a card that kicks back, say, $3 in rewards, then pay your balance in full, rather than pay with cash or debit and get nothing back. But rewards cards aren’t for everyone, at least not all the time.

When not to use a rewards credit card

Among Americans who have revolving credit card debt, 18% say the debt is worth it for the rewards they earn on their spending. But the math simply doesn’t bear this out. When you carry credit card debt from month to month, you incur interest on new purchases as soon as you make them. That interest will almost certainly outweigh the rewards earned on purchases, perhaps faster than you think.

The NerdWallet report shows how quickly this can happen: Say you get a new credit card that earns 2% cash back and charges the average interest rate, which was 22.77% in the most recent figure available from the Federal Reserve. If you spend $1,000 a month on the card but make payments of $500 a month, the interest you’ll pay will outweigh the rewards you’ll earn in less than six months. And that’s when you’re starting from $0 on a brand new card; if you’re already carrying a balance on a credit card, you may pay more in interest than you ever earn in rewards on a purchase.

Of course, using a credit card for expenses might not be optional. The survey found that 31% of Americans with revolving credit card debt say they need to use a credit card to make ends meet. If that is your situation, look at your spending to ensure you’re not going further into debt for nonessentials. Cut back where you can, but at the end of the day, putting food on the table and keeping the lights on are what matter most.

That said, if you’re using a rewards card while carrying debt on the card and you have the option to switch to cash or debit, do so and focus on paying down the debt. You can go back to using credit to earn the rewards after the debt is eradicated and you’re no longer incurring interest.

Paying off credit card debt

If you’ve stopped adding to the balance, it’s time to make a plan to pay off your debt. Start by getting the full picture. According to the survey, 13% of Americans who currently have revolving credit card debt aren’t sure exactly how much they owe. Log into your accounts to get your current balances, minimum monthly payments and interest rates. You might opt for the debt snowball method, in which you focus on the smallest debts first, or the debt avalanche, where you target the highest interest balances. You could choose to pay off the debt that upsets you the most first. The best debt payoff method is the one you stick to — everything else is details.