Rewards are useful. Interest can cost more.

Begin with your payment habit

If you regularly carry a balance, compare the borrowing cost first. An attractive rewards rate does not cancel the interest on unpaid debt. Consider whether a payoff plan, a lower-rate product, or reducing new card spending would improve your position more than a new rewards offer.

If you usually pay the full statement balance, review the card’s grace-period terms. A purchase grace period may help avoid interest when its conditions are met, but it generally does not apply in the same way to cash advances and other transaction types.

Value rewards conservatively

Use your normal spending categories and realistic annual totals. Do not increase spending merely to reach a sign-up threshold or category bonus. Subtract the annual fee and any costs you would incur only to use a benefit.

Cash back can be straightforward, while travel points may have different redemption values and availability. Estimate value using trips or purchases you would actually make. A theoretical premium redemption is not a saving if it is not something you would otherwise choose.

Read the ongoing terms

Promotions end. Compare the regular purchase APR, annual fee, foreign-transaction fees, category limits, and redemption restrictions. Check whether a benefit renews automatically or requires enrollment. Keep your evaluation focused on the full year after any introductory period.

Build a simple yearly estimate: rewards you expect to redeem plus benefits that replace real spending, minus fees. If you carry a balance, separately estimate interest. The comparison often becomes clearer once every element is expressed in dollars.

How card interest is calculated

Many issuers calculate interest daily on the average daily balance. The daily periodic rate is generally the APR divided by 360 or 365, depending on the issuer, and each day’s interest is added to the balance, so interest compounds daily. At 24% APR divided by 365, a $1,000 balance accrues about $0.66 a day and about $19.92 over 30 days.

Over a year, a balance that stays at $3,000 at 24% costs about $720 in interest. That is the number to compare with the rewards the card earns, and it is why a card with a lower APR and no rewards is often the better card for someone who carries a balance.

Sources: CFPB: How credit card interest is calculated · CFPB: Daily periodic rate

What the grace period protects

Card issuers are not required to offer a grace period, but most cards provide one on purchases: pay the full statement balance by the due date and you pay no interest on those purchases. If you do not pay in full, you are charged interest on the unpaid portion and on new purchases starting from the date each purchase is made. If you pay in full some months but not others, you may lose the grace period for the month you do not pay in full and for the month after.

Federal rules limit how far back that interest can reach. Regulation Z bars issuers from charging interest based on balances from billing cycles before the most recent one when a grace period is lost, which rules out the two-cycle billing method. Paying the full statement balance every month is still the only way to keep rewards from being offset by interest.

Sources: CFPB: Credit card grace periods · CFPB: Regulation Z § 1026.54, limits on finance charges

Value rewards on your real spending

The CFPB suggests comparing the rewards you expect to receive and actually use each year with the annual fee. Take a household that spends $600 a month on groceries and dining and $900 on everything else, $18,000 a year. A flat 2% card with no fee earns $360. A card paying 3% on groceries and dining and 1% on everything else earns $324, or $229 after a $95 annual fee.

The fee card would come out ahead only for a household whose spending is heavily concentrated in its bonus categories, and only if the rewards are redeemed at full value. A sign-up bonus with a spending threshold is worth counting only if your normal spending reaches it; spending more to earn a bonus usually costs more than the bonus returns. The CFPB notes that low-rate cards typically do not offer rewards and do not charge an annual fee, which can make them the better fit for anyone who carries a balance.

Sources: CFPB: How to find the best credit card for you (PDF) · CFPB: Know Before You Owe, credit cards

When rewards are worth less than promised

In a 2024 report on credit card rewards, the CFPB identified four recurring problems in consumer complaints: unexpected promotional conditions, devaluation, redemption problems, and revocation. Consumers reported that issuers and merchants reduced the value of rewards already earned by raising the number of points or miles needed for a redemption, and that points, cash back, and miles vanished when an account closed.

The same report notes that prior CFPB research found that, for many borrowers, the benefits of rewards programs fail to exceed the costs of credit cards. Redeem rewards regularly rather than stockpiling them, read the conditions on any sign-up bonus, and treat a large points balance as something that can shrink. If you plan to close a card, redeem its rewards first, since they can vanish when the account closes.

Sources: CFPB: Credit card rewards issue spotlight (2024)

Annual fees and the card agreement

The CFPB’s advice on annual fees is to ask whether the benefits or rewards you actually get are worth the fee. Some issuers charge the fee in monthly installments, which makes it easier to overlook, so add it up for a full year. Before you apply, read the card’s agreement; the CFPB’s credit card agreement database collects general terms, pricing, and fee information from issuers.

If you already carry a balance on a rewards card, consider using a different way to pay for new spending until that balance is gone. Without a grace period, new purchases on the card start accruing interest from the day they are made, so the rewards on them are usually outweighed by the interest.

Sources: CFPB: Know Before You Owe, credit cards · CFPB: How to find the best credit card for you (PDF) · CFPB: Credit card agreement database · CFPB: Credit card grace periods

Penalty rates and the minimum payment warning

If you are more than 60 days late with a minimum payment, the issuer can raise your rate to the penalty APR. If that happens, it must restore your old rate after six consecutive on-time minimum payments. One missed payment can cost far more than a year of rewards. Automatic payments for at least the minimum are the simplest protection.

Your statement must also carry a minimum payment warning showing how long it would take to pay off the balance with only minimum payments, what that would cost in total, and the monthly payment needed to pay it off in 36 months. If you carry a balance, that 36-month figure is a useful starting target.

Sources: CFPB: Regulation Z § 1026.55, limits on rate increases · CFPB: When a card issuer can raise your rate · CFPB: Regulation Z § 1026.7, periodic statements

Your next-step checklist

• Decide whether you pay in full every month or carry a balance.
• If you carry a balance, compare APRs first.
• Value rewards on your actual spending, minus annual fees.
• Redeem rewards regularly and read bonus conditions.
• Pay at least the minimum on time to avoid a penalty APR.
• Use the statement’s 36-month payment as a payoff target.