Are credit card rewards worth it?

Rewards are worth it only if you pay your full statement balance every month. Carry a balance at a typical card rate and the interest can cost far more than the cash back or points you earn.

Rewards only work if you pay in full

When you pay the full statement balance by the due date, your grace period means new purchases cost no interest. Then rewards are pure gain. Carrying a balance flips the math.

People who carry balances pay most of the interest

CFPB research found that cardholders who carry debt from month to month pay 94% of total card interest and fees but get less than 30% of rewards.

Annual fees need heavy spending

A card with a fee must earn more than the fee, beyond what a no-fee card would earn on the same spending. Many people never reach that point.

Rewards are not locked in

The CFPB has reported that card companies devalue points, let them expire and cancel them when accounts close. Treat unredeemed points as worth less than they look.

How rewards cards make money

Each time you use a card, the store pays a fee to the card network and the bank. Part of that fee funds your rewards. Card companies also earn from annual fees, late fees and interest on balances people carry.

That's why rewards cards can afford to be generous with people who pay in full. The money comes from the stores, from fees and from cardholders who carry a balance.

Cash back, points and miles

Cash back is the simplest. A flat card might pay the same rate on everything. Other cards pay more in a few categories, like groceries or gas, and less on everything else. Some rotate the bonus categories every few months and make you sign up each time.

Points and miles have no fixed value. A point might be worth a cent toward a statement credit, more for travel through the issuer's site, and less for gift cards or merchandise. The company sets those values and can change them.

To compare fairly, turn every reward into cents per dollar spent. If a travel card's points are worth 1 cent each for what you'd actually book, 2 points per dollar is 2%, the same as a 2% cash back card.

The real cost of carrying a balance

Interest wipes out rewards fast. At 24% APR, you're charged about 2% a month on what you carry. A 2% reward on the same amount earns that back only once, while interest charges it again every month the balance stays.

If you have a card balance today, rewards should be your last concern. Look at a lower rate, a balance transfer or a payoff plan instead. Come back to rewards once your statement balance goes to $0 every month.

When an annual fee is worth it

Start with what a no-fee card would earn on your real spending. Then add only the benefits you'd actually use and pay for anyway, like a travel credit or checked bags. If the extra value beats the fee by a clear margin, the fee can make sense.

Look at it again every year when the fee posts. Your spending may have changed, or the card's benefits may have. If it no longer pays off, ask about a no-fee version before you close it, since closing a card can affect your credit.

Sign-up bonuses

Many cards offer a bonus after you spend a set amount in the first few months. That can be worth a lot if the required spending fits your normal bills. Read the fine print for the deadline and what counts as spending.

The CFPB has heard many complaints about bonuses denied over hidden conditions. Keep screenshots of the offer and your application, and track your spending toward the target.

Protecting rewards you've earned

The CFPB found that card companies take away hundreds of millions of dollars in earned rewards each year through expiration, devaluation and closed accounts. If your card is closed, by you or by the bank, any points left on it may be gone.

Redeem cash back regularly. Before you close a card or let it go unused for a long time, use or transfer what's there. If rewards you earned are taken away unfairly, you can file a complaint with the CFPB.