November 19, 2018
Would you pay $17 to get $2 back? Few people would – but a new survey suggests that many Americans are effectively doing so because of the way they handle their rewards credit cards.
You may think, "Why have a rewards card if you don't load it up with purchases? You have to spend money to get rewards."
According to a new survey from CreditCards.com, too many Americans follow that line of logic – and make a huge mistake in the process. Over half of survey respondents (57%) have at least one type of rewards card, with cash-back the most popular at 43% of rewards cards – but only 41% of those respondents pay off their rewards cards in full each month.
The average annual percentage rate (APR) for credit cards is currently over 17%. Meanwhile, most cash-back rewards are in the 1-2% range, with some offering 4% to 5% on certain purchases. Interest charges on any balances will quickly overwhelm savings.
According to 2017 data from NerdWallet, the average household that carries credit card balances pays $904 each year on interest. Given a 2% cash back rewards card, you'd have to make $45,000 of eligible charges just to break even. With $45,000 in charges, could you pay off enough to keep interest charges down to $900?
The CreditCards.com survey suggests that most Americans can't. Approximately 35% of respondents with rewards cards pay the full monthly balance no more than six months out of the year – and 10% never pay off their balance in full.
If there's a silver lining in the survey, it's the avoidance of annual fees. Almost three-quarters of rewards cardholders have at least one card that has no annual fee, while only 10% have cards with annual fees over $150.
A large annual fee is one more expense to subtract from potential rewards. Many rewards cards without annual fees are available given a sufficient credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips. A $150 annual fee on a 2% cash back card equals $7,500 in eligible charges – paid in full, with no carried balances.
The break-even numbers above also assume you redeem your rewards. Most cardholders with cash-back rewards do redeem them – according to the survey, around 52% of rewards cardholders had redeemed them for cash within the past year. Another 29% did effectively the same thing by redeeming rewards points for gift cards, but gift cards sometimes go unused.
However, redemptions for other rewards lag far behind. Only 13% of respondents used their rewards for merchandise, 9% redeemed their points for a free lodging at a hotel, and 8% used their miles/points for free airline tickets.
The most surprising finding was that 22% of rewards cardholders hadn't redeemed any rewards at all. If you're not going to earn any rewards or redeem the rewards you earn, why even bother with a rewards card? Your financial priorities should probably be elsewhere.
If you can't pay off your bill each month, your focus should be on APR and not rewards. Create a budget that provides you with a surplus that allows you to pay down your debt, and then consider a balance transfer card that offers a 0% APR introductory period.
What if you can't keep charging more than you can afford to pay? Consider throttling back your credit cards and use debit cards, only charging small amounts that you can easily pay. You'll raise your credit score and qualify for better interest rate offers in the future.
If all else fails, you can stop spending more than you have by relying on those funny green rectangles with numbers on the corners. Remember those?
If you want more credit, check out our list of credit card offers.
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