Two-thirds of Americans with credit card debt still try to maximize credit card rewards, even if it means they’re losing money in the long run, a new study revealed.
Consumer financial services company Bankrate surveyed 1,740 credit cardholders and found of the 44 percent that carry debt from month to month, two-thirds still try to maximize credit card rewards. Bankrate Senior Industry Analyst Ted Rossman said this can be a costly mistake because credit card rewards are only worth it if the consumer pays off their balance each month.
“I love credit card rewards but only if you’re paying in full and avoiding interest,” Rossman said. “I just think it’s very important to do the math.”
The average credit card interest rate is a record-high 20.75 percent. Rossman said it doesn’t make sense to pay hefty interest rates if a borrower is only earning one to five percent in cash back or airline miles.
“If you’re among the 56 percent of cardholders who can pay in full, then rewards are great and it’s all free money,” Rossman said. “But you have to avoid interest for it to be worthwhile.”
Instead of chasing rewards, Rossman said there are three steps consumers in debt need to consider.
ZERO PERCENT BALANCE TRANSFER CARD
Rossman recommends consolidating your debt with a balance transfer card that won’t charge you interest for up to 21 months. He said you generally need good credit to qualify–a credit score of 670 or better. There’s also a small fee upfront.
“Take advantage of that nearly two-year runway without interest charges,” Rossman said. “It may not come with rewards, but that’s okay. The savings [from no interest] are going to be more impactful than a few percentage points of cash back.”
NONPROFIT CREDIT COUNSELING
If you have a low credit score or a lot of debt—more than $5,000 or $6,000—Rossman said you should find help from a nonprofit credit counseling organization. He recommends Money Management International or GreenPath Financial Wellness.
“They can often negotiate something like a seven percent interest rate over four or five years. It’s not zero, but it’s a longer term, very accessible and they’ll walk you through the process,” Rossman said.
STICK TO CASH OR DEBIT FOR AWHILE
If all else fails, Rossman said put your credit card away and use cash or a debit card.
“Go for rewards later on once you’re debt free,” Rossman said.
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