Paying Interest on a Rewards Card? Bad Idea

Rewards credit card offers have ramped up this year, with many credit card issuers offering better rewards than ever before. The Capital One Venture Card, for example, pays 2% cash back on purchases. Discover it Card pays 5% on quarterly rotating categories and 1% on everything else. And the American Express Blue Cash Preferred pays 6% cashback on groceries, 3% on gas and department stores, and 1% on everything else. Those are just a few of the best rewards credit cards out on the market right now.

Most credit card users should have at least one rewards credit card in their wallet, at least a cashback credit card if the points or travel rewards credit cards don’t sound attractive to you. If you sign up for a rewards credit card there’s one big rule to follow: never pay interest on your balance. When you pay interest on a card that you’ve earned rewards, you diminish the value of the rewards you’ve earned.

Consider this scenario: you earn $12 in rewards in a particular month and you also pay $15 in finance charges that month. You’ve kind of paid for your rewards; in fact, you’ve paid $3 more in interest than you received in rewards. Imagine, on the other hand, if you earned $12 in rewards and paid no interest. In that situation, you paid nothing for your rewards.

Many rewards credit cards come with a 0% introductory rate on purchases or balance transfers or both. Take advantage of the no interest promotional period, but don’t get too complacent. Once the promotional rate expires, you’ll start paying finance charges at the regular interest rate. With a high balance, you could easily pay more interest than rewards you’ve received.

You’ll get the most out of your rewards card if you pay the balance in full and avoid paying any interest on your balance. Even if you have a low interest rate or low balance, still pay your balance in full because any amount of interest paid can decrease the true value of your rewards. That means you have to charge only what you can afford to pay at the end of the month. You may be tempted to spend more money so you can accumulate more rewards, but still consider what you’re able to pay and never charge more than that amount.

If there’s a situation that you can’t pay your balance in full, take a break from new charges until you can pay your balance off. That way, you’ll pay less interest than if you kept racking up more charges on top of what you already owe.