Tricked by Reward Credit Card Treats

If you pay interest charges on a reward credit card, those rewards don’t really amount to much.


Don't let a reward credit card trick you into

A reward credit card can offer a wide range of treats designed to get you to charge. However, if you don’t manage debt effectively, you could see those rewards disappear before your eyes. It’s a trick that creates high interest rate credit card debt that can be monstrous compared to the incentives you earned.

The good news is that there is a trick you can pull that will maximize credit card reward treats. And it’s easier than you might think…

How to use a reward credit card interest free

Almost all credit cards apply interest charges the same way. The annual percentage rate gets divided into a periodic interest rate – that’s the interest rate applied each billing cycle. The creditor applies periodic interest to the average daily balance for that billing cycle. They calculate average daily balance based on your balance at the start and end of the billing cycle.

What that means is that if you start and end a billing cycle at zero, you don’t pay interest charges. If you pay your balance off in full every month, then you make charges completely interest free. This is how you make a reward credit card actually rewarding. Otherwise, any rewards you earn are quickly offset by interest charges.

How fast do interest charges cancel out rewards?

Fast. Much faster than you might think.

Let’s take a typical cash-back reward credit card that earns 1.5% cash back on every transaction you make. According to, the average APR on a cash-back rewards credit card is just over 16%.

So, let’s say that you charge $500 on a card that has a standard 2% minimum payment schedule.  You earn $7.50 on the purchase. Great!

Here’s where most people get tricked: At 16% APR, interest charges eat up $6.67 of the payment you make. That means to earn $7.50 you spend $6.67, resulting in a net profit of just 83 cents.

Once interest charges apply, cash back rewards disappear quickly. But keep in mind that if you started the billing cycle with a zero balance and pay it off completely that cycle, interest charges don’t apply. You earn the full $7.50.

On the other hand, if you had a balance at the start of the billing cycle, interest charges apply that cycle. So, most of your rewards get eaten up in the first month if you carry balances over.

Always pay in-full to maximize reward credit card treats

In order to use a reward credit card strategically to get the most benefit, you should always pay the balance in-full. That way, you start and end each billing cycle with a zero balance, making all your purchases interest-free.

Using a reward credit card in any other way means you usually end up spending more to earn less. We used a cash back example above, but point rewards and travel rewards are the same, too. You should only make purchases with a reward credit card that you know you can pay off. Otherwise, you waste your money.

This also means that you need to choose another credit card or financing option for big-ticket purchases. It can seem like a great idea to charge your big screen TV for 1.5% cash back. Earning 1.5% cash back on a $2,500 purchase may sound extremely lucrative. But in reality, you’re unlikely to pay off the balance in time to earn anything.

If you make a large purchase that can’t be paid back in a single billing cycle, always go for the financing option with the lowest interest rate. That could be a low interest credit card or an in-store credit line. Even better, wait a few months and save the money you would spend on the credit card bills to save up for a cash purchase.

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