When Do Credit Cards With Rewards Really Benefit You?

Illustration showing the point where credit card interest outweighs credit card rewardsMany credit cards offer rewards of some description these days. Putting a value on these rewards can be difficult, and different people will get more or less benefit from the same piece of plastic, depending on their lifestyle. For example, if you do a lot of travelling, getting air miles and travel insurance will be more helpful for you than someone who doesn’t venture far out of their locality.

Other credit card providers may offer you cash back rewards, or discounts on certain purchases, and while many of them sound tempting, you may begin to wonder: what’s in it for them? I think we all accept that credit card providers are trying to make a profit, and there’s nothing wrong with that, but at the same time, it’s worth taking a little time to get to know how beneficial the rewards actually are, and what steps you can take to make the most of them.


When comparing different credit cards, the figure you want to look at first is APR. This is basically a standardized way of comparing interest rates and fees over the course of a year, and while it’s not perfect, it’s a reasonable baseline for making comparisons. As of this writing, the average APR for credit cards is a little under 15%, which means that the credit you use on your card will cost you 15% of its value over a year.

Except, it doesn’t. What APR doesn’t take into account is compound interest. In other words, if you make purchases of $100, then after one month, you’ll be charged 15% interest divided by 12 months, or approximately 1.25%. That makes your new balance $101.25, and if no repayments are made, your new interest will be calculated on this figure, NOT the original $100. When you work it out, 15% APR actually costs you a little over 16%, and this figure is called the Annual Percentage Yield, or APY.

Comparing Reward Credit Card Payments

So what does APR and APY have to do with credit cards with rewards? Well, it’s all about give and take: the credit card provider will give your rewards, but it will take back in the form of interest and fees. The best case scenario is if you have a reward card with no annual fees, and you clear your balance every month. In this case, you get the benefits of cash back, air miles, or whatever other rewards are available, but it doesn’t really cost you anything to get them.

Of course, many people don’t pay off their debt in full every month, so let’s suppose you have a card that gives you 5% cashback on purchases. Sounds tempting, right? So in January, you make one purchase of $200, and you decide to pay off 10% of your balance each month. Here’s how that works out:

Balance Repayments Repayments to date Interest Interest to date Reward Benefit
Start 200.00 0.00 0.00 0.00 0.00 10.00
Jan 182.41 20.00 20.00 2.41 2.41 7.59
Feb 166.37 18.24 38.24 2.20 4.61 5.39
Mar 151.74 16.64 54.88 2.01 6.62 3.38
Apr 138.39 15.17 70.05 1.83 8.45 1.55
May 126.22 13.84 83.89 1.67 10.11 -0.11
Jun 115.12 12.62 96.51 1.52 11.64 -1.64
Jul 105.00 11.51 108.03 1.39 13.02 -3.02
Aug 95.76 10.50 118.53 1.27 14.29 -4.29
Sep 87.34 9.58 128.10 1.15 15.44 -5.44
Oct 79.66 8.73 136.84 1.05 16.50 -6.50
Nov 72.66 7.97 144.80 0.96 17.46 -7.46
Dec 66.27 7.27 152.07 0.88 18.33 -8.33

When you start out, your “reward benefit” is $10, but as interest builds up, it starts to eat into that amount, until eventually, they credit card provider starts to make its money back.

For the first 5 months, you are still getting the benefit of the rewards, but after that, things go in the providers favor. After a year, the rewards have been used up, the credit card provider has made about 4% profit ($8.33 on the original $200), and you still have about a third ($66.27) of the original amount left to pay back!

Let’s look at the same figures again, but this time making regular payments of $20 (i.e. 10% of the original amount, rather than 10% of the current balance).

Balance Repayments Repayments to date Interest Interest Sum Reward Benefit
Start 200.00 0.00 0.00 0.00 0.00 10.00
Jan 182.41 20.00 20.00 2.41 2.41 7.59
Feb 164.59 20.00 40.00 2.18 4.59 5.41
Mar 146.52 20.00 60.00 1.94 6.52 3.48
Apr 128.22 20.00 80.00 1.69 8.22 1.78
May 109.67 20.00 100.00 1.45 9.67 0.33
Jun 90.87 20.00 120.00 1.20 10.87 -0.87
Jul 71.82 20.00 140.00 0.95 11.82 -1.82
Aug 52.51 20.00 160.00 0.69 12.51 -2.51
Sep 32.95 20.00 180.00 0.44 12.95 -2.95
Oct 13.12 20.00 200.00 0.17 13.12 -3.12
Nov 0.00 13.12 213.12 0.00 13.12 -3.12

This is much better! The benefits of your rewards last an extra month, your balance has been fully paid off in 11 months, and in the end, you only gave your credit card provider about 1.5% of the original purchase price: not a bad rate at all!

Your mileage may vary, and this simple example is not realistic for most people (cashback cards are more likely to be 1-2%). What it does show, however, is that to get the most out of credit cards with rewards, you should pay off your balance as early and as often as possible.

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