As we've mentioned in the past, a rewards card only benefits you if the value of the reward offsets any extra fees you might have to pay. We're going to run through some example numbers to help illustrate the point. As always, your credit card agreement will detail exactly what fees you need to pay, so consult that for details about your card.
First, the simplest example â€“ a card that has no annual fee, and if paid off in full every month, has no finance charge. If you have this card and can pay it off every month, congratulations, any reward that you get from the card is a benefit.
Second, an annual fee of $100, and if the balance is paid in full every month, there is no finance charge. Let's also assume you can pay off the balance every month. For the rewards program, we'll use a 1 mile per dollar spent frequent flier program. An average flight takes about 25,000 frequent flier miles. If an average flight is $300, each mile you earn gives you a bit more than 1 cent's worth of benefit (1.2 cents), so you'll have to accumulate 8334 points to offset your $100 annual fee. That's $8334 you have to spend on your credit card each year.
Third, no annual fee, but you carry a starting balance of $5000 for 12 months, make no new charges, and only pay the minimum payment which starts at $125. Your interest rate is 11 % on a non-rewards card. According to the minimum payment calculator at Bankrate, you'll be paying $504.57 in interest over those 12 months. For the airline rewards version of this card, the interest rate is 18%. According to the same calculator, your total interest payments for the year will be $852.10 â€“ a difference of $347.53. Using our 1 mile per dollar program with the average flight costing $300 or 25,000 miles, you'd need to accumulate 28961 miles to offset those extra interest charges. Of course, we assumed you're making no new charges, so you can't accumulate those miles. With a more modest interest rate of 12% on the airline miles card, you'll be paying $552.90 in interest - $48.33 difference. With the same rewards program, it would take 4028 points to offset the extra interest.
As should be evident, even small increases in interest or fees result in large increases in spending required to accumulate the extra miles needed to offset the fees and interest. What's the moral of this story? Pay off your rewards card in full every month. That's good advice if you have a non-rewards card too.