Credit card rewards are a great way to maximize everyday purchases.
After all, if you need to make a purchase, you might as well get some kind of return.
However, a recent study by the Consumer Financial Protection Bureau shows a surprising number of consumers aren’t using cards that can earn them points, miles or cash back—even those who have the high credit scores that are needed to qualify for these programs.
The study states that nearly 20% of all credit purchases made by those with prime credit—that is, those with a credit score of between 661 and 780—were made on cards without rewards.
The percentage of rewardless purchases is even higher for those with lower credit, which is to be expected, since many of those people lack the creditworthiness to qualify for rewards cards.
However, just because someone qualifies to receive a rewards card doesn't necessarily mean they should get one. In some scenarios—notably, when you’ll carry a balance on your card, even for a few months—you can save money (to the tune of hundreds of dollars) if you forgo rewards and instead use a non-rewarding card. Here’s a rundown of when it does and doesn’t make sense to be so rewarded.
When not to use a rewards credit card
Rewards aside, among the attributes of cards that offer few or no rewards is that they have generally lower interest rates than rewards cards. Non-rewards cards are primarily made up of low-interest cards, and should therefore be used by people who carry a balance.
Reward-earning credit cards are often considered to be “premium” cards, and in turn charge higher interest rates on balances than a plain and simple card. The result: carrying a balance on a reward earning credit card with a high interest rate can cost you more in interest payments, so much so that the value of rewards you earn will be negated.
For example, if you pay off a $2,000 balance over 10 months on a rewards credit card with a 19.75% APR, you’ll pay a total of $164 in interest charges by the time the balance is paid off. If this were a rewards card earning you 2% cash back card, you would only earn $40 in rewards. Therefore, you would still be down $124 after paying interest.
By contrast, by putting those purchase onto a non-rewards card, with a 13% APR, you’d pay a total of $104 in interest charges by the time the balance is paid off. Even considering the $40 in rewards you’d forgo by not using the rewards card, you’d still be ahead by $20.
You’d save even more on interest by putting the balance onto a 0% APR card instead. Another popular type of non-rewards credit card, these cards offer a 0% promotional interest rate that can help you go interest-free for as long as 21 months. During this time period, no interest is charged on new purchases or on balance transfers, giving you time to pay down existing debts or large purchases that you may not be able to pay down at once.
Be aware, however, that after the promotional period ends, the remaining balance is subject to the APR for which you were approved. Additionally, there’s usually a 3% to 5% balance transfer fee added to the total balance transferred. In our scenario above, that fee would range between $60 and $100, which would still save between $64 and $104 over the rewards card. When looking for a balance transfer card, prioritize cards with a low balance transfer fee and a long 0% promotional period.
Who should be using credit cards that earn rewards?
Reward credit cards should be favored choices for consumers who don’t typically carry a balance month-to-month, and have a high credit score. Shop in part by rewards rate; assuming you have an excellent credit score, don’t settle for a card that gets you less than 1.5% to 2% cash back on purchases.
Cards don’t invariably offer cash back, of course, and the aforementioned CFPB study gives us insight into what type of rewards American consumers most like to earn. As of 2016, 27% of U.S. credit card purchases were made with cashback rewards cards and 21% with credit cards that earned third-party travel rewards like airline miles. The remaining purchase volume was made by credit cards that earned multi-purpose bank points or earned no rewards at all.
Cashback awards were most popular across all credit scores, while earning mileage tended to be more popular with people with higher credit scores.
Keep in mind, also, that cash back rewards are more flexible than miles and points.
Cardholders can always use cash back to put extra money in their wallets, but miles and points are usually only useful if you’re planning a vacation—something that most people do only a handful of times per year, if that. Cash back cards also generally don't charge annual fees.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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