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WalletPrep worksheet · Credit

Are credit card rewards worth it?

Name ____________________ Date __________

Key ideas

  1. Interest beats rewards almost every time. A 24% card rate is about 2% a month on what you carry. That erases a 2% reward on the same amount.
  2. A flat cash back card is the baseline. Points and miles can be worth more or less than cash. Compare every card to simple cash back with no annual fee.
  3. Rewards can change or disappear. Card companies can change how much points are worth, and you often lose them when the account closes. Redeem regularly.

Vocabulary

Annual fee
A yearly charge some credit cards add to your bill just for having the card, whether you use it or not.
Grace period
The time between the end of a credit card billing cycle and the due date, when new purchases are interest-free if you paid in full.
APR
Annual percentage rate: the yearly cost of borrowing money, shown as a percentage. It is the number to compare on cards and loans.
Balance transfer
Moving debt from one credit card to another, usually to get a low or 0% promotional APR for a set number of months.
Sign-up bonus
Extra rewards a credit card pays when you open the account and spend a set amount within the first few months.

Work it out

Leo spends $1,500 a month on a 2% cash back card. He also carries a $3,000 balance at 24% APR and pays only the interest each month.

  1. Monthly spending
  2. Cash back a year (2%)
  3. Interest on $3,000 at 24%
  4. Net for the year
  5. Cash back a year (2%)
  6. Interest if paid in full
  7. Net if paid in full

Check yourself

  1. You spend $1,000 a month on a 1.5% cash back card. How much do you earn in a year?

    • A. $15
    • B. $150
    • C. $180
    • D. $1,800

  2. A card pays 3% with a $95 annual fee. A no-fee card pays 2%. Above what yearly spending does the fee card come out ahead?

    • A. $3,167
    • B. $4,750
    • C. $9,500

  3. When are rewards most likely to be worth it?

    • A. When you pay the full statement balance every month
    • B. When you pay the minimum on time
    • C. When you carry a small balance
    • D. When you open several cards at once

Your turn

Open your card account and check last statement's interest charge. If it's above $0, switch your focus to paying the balance off. If it's $0, set autopay to the full statement balance and redeem any rewards sitting there.

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Answer key

Are credit card rewards worth it?

Work it out

  1. Monthly spending$1,500
  2. Cash back a year (2%)$360
  3. Interest on $3,000 at 24%− $720
  4. Net for the year= -$360
  5. Cash back a year (2%)$360
  6. Interest if paid in full− $0
  7. Net if paid in full= $360
  1. Leo earns $1,500 × 2% = $30 a month, or $30 × 12 = $360 a year.
  2. His balance costs $3,000 × 24% ÷ 12 = $60 a month, or $60 × 12 = $720 a year. $360 − $720 = −$360, so he's $360 behind.
  3. If he paid the $3,000 off and then paid in full each month, he'd keep all $360. Paying $150 a month, it would take 26 months and $869.62 in interest.

Check yourself

  1. C. $180 $1,000 × 1.5% = $15 a month. $15 × 12 = $180 a year.
  2. C. $9,500 The fee card earns 1% more. $95 ÷ 1% = $9,500. Below that, the no-fee card earns more after the fee.
  3. A. When you pay the full statement balance every month Paying in full means no interest, so the rewards are pure gain. Any carried balance usually costs more in interest than the card pays back.