Rewards Cards and Debt: Why Interest Can Erase Your Cash Back

The Hidden Cost of Carrying a Balance

Credit card rewards are designed to encourage spending, but they come with a catch: if you carry a balance, the interest you pay can far exceed the value of the rewards you earn. The Consumer Financial Protection Bureau reports that the cost of interest and fees almost always exceeds the value of rewards. This means that even a generous cash-back rate won’t save you from the cost of carrying debt.

Rewards cards are prevalent: reward credit cards accounted for 60 percent of all new credit card originations in the United States in 2019, and the largest U.S. banks paid out $35 billion in credit card rewards that year. But those rewards are not equally beneficial for everyone.

• Carrying a balance on a rewards card can make the rewards unprofitable, as interest and fees typically exceed rewards earned.
• The Consumer Financial Protection Bureau notes that when a consumer revolves a balance, the interest and fees almost always outweigh the rewards.
• Federal Reserve research on rewards card APRs shows that banks offered lower rates on reward cards than on similar classic cards across the entire FICO distribution.

Sources: Consumer Financial Protection Bureau, Federal Reserve Board, International Monetary Fund

Calculating Interest vs. Rewards: The Math

To understand why rewards can’t beat interest, it helps to do the math. Two numbers matter: the APR (annual percentage rate) on your card and the rewards rate you earn on purchases. The APR is the nominal interest rate used to calculate the monthly finance charge, typically by dividing the APR by 12 and applying it to your average daily balance.

In this scenario, the rewards just barely cover the interest, but if you have a larger balance or a lower rewards rate, the interest will outpace the rewards.

Federal Reserve data confirms this dynamic. The study found that sub-prime borrowers (with FICO scores below 660) earn an average of only $1.8 per month in rewards on rewards cards, while paying an additional $6.4 per month in interest compared to similar classic cards. On the other hand, super-prime borrowers (FICO scores above 780) earn an average of $9.5 per month in rewards and also pay $7.1 less in interest on rewards cards, resulting in a net gain. The difference comes down to creditworthiness and the ability to pay off balances in full.

The key takeaway is that rewards are only worthwhile if you can avoid paying interest. If you carry a balance, the interest will almost certainly eat into—or completely erase—your earnings.

Sources: Federal Reserve Board, International Monetary Fund, Consumer Financial Protection Bureau

Real-World Examples: How Debt Erodes Rewards

The math becomes clearer with concrete examples.

So your rewards are far less than the interest charge, and your debt grows.

These examples show that even a modest balance and typical rewards rate can quickly lead to interest charges that outstrip earnings. The rewards simply can’t keep up with the cost of debt.

Sources: Consumer Financial Protection Bureau

Strategies to Pay Off Balances Fast

If you already have credit card debt, focus on paying it off as quickly as possible. Making only minimum payments can trap you in debt for years and make purchases far more expensive. Instead, consider a more aggressive approach:

Pay more than the minimum each month, even if it’s only a little extra. The more you pay above the minimum, the faster your balance shrinks and the less interest you accrue over time.

You can also use your cash-back rewards to reduce your balance. Many issuers allow you to redeem rewards as a statement credit, which effectively pays down your debt. This doesn’t erase the debt, but it can lower your interest charges and speed up repayment.

If you have multiple cards, consider using a debt payoff strategy like the snowball method (pay off the smallest balance first) or the avalanche method (pay off the highest APR first). Both approaches can help you stay motivated and save on interest.

Sources: Chase, Synchrony

Using Balance Transfer Offers Wisely

Balance transfer credit cards can be a useful tool for getting out of debt faster. They allow you to move existing balances to a new card with a lower introductory rate, often 0% for a period of 12-18 months. This can save you a significant amount of money on interest if you can pay off the balance before the promotional period ends.

However, balance transfers usually involve fees: a typical balance transfer fee is 3% to 5% of the amount transferred. If you can avoid the interest charges during the intro period, the fee may be worth it, but you need to calculate whether the savings outweigh the cost.

Balance transfers are not a free pass. You still owe the full balance, and if you don’t pay it off before the intro rate expires, you’ll start accruing interest at the regular APR. Use balance transfers strategically, and always have a plan to pay off the debt before the promotional period ends.

Sources: Chase, CNBC Select

Behavioral Tips to Avoid Overspending

The best way to keep rewards from turning into debt is to avoid overspending in the first place. Rewards cards can encourage spending you might not otherwise do, especially when you’re earning cash back on every purchase.

To stay on track, treat your credit card like a debit card: only spend money you actually have. Set a budget for each category, and check your spending regularly to ensure you don’t exceed it. If you struggle with impulse purchases, try a cooling-off period for larger buys, like waiting 24 hours before making a non-essential purchase.

Another effective strategy is to redeem your cash back regularly and use it to pay down your balance or boost your emergency savings. This reinforces the habit of treating rewards as a bonus, not as a license to spend more.

Sources: Investopedia, Synchrony