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Rewards credit cards earn points, miles, or cash rewards on your everyday purchases. They can be a simple way to put money back into your budget, especially when your card rewards you for purchases you’re already spending money on, like groceries or gas.
But rewards credit cards have a dark side. Though they can be instrumental in saving you money, they come with high annual percentage rates (APRs) that could trap you in a spiral of debt. The average credit card interest rate for rewards cards is 24.57%, according to LendingTree. If you had the average credit card debt ($6,501, according to The Motley Fool Ascent), you would pay about $1,135 in interest if you were making $500 monthly payments over 15 months.
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But herein lies the single worst mistake you can make with rewards credit cards. While paying $500 on this debt would mean paying it off in less than 1.5 years, credit card companies may not require you to make a payment this high. In fact, if you’re not careful, you could fall into a common trap — paying the minimum on your credit card.
A credit card minimum payment is the smallest amount you’re obligated to pay each billing cycle to remain in good standing on the account. Paying the minimum means you can avoid late penalties, as well as protect your credit from delinquency. It’s also the slowest way to pay your credit card bill and could result in paying a hefty amount in interest.
For example, let’s say you had a balance of $6,501 on a rewards credit card with an APR of 24% and a minimum payment that’s 2.5% of the balance. If you only paid the minimum amount, it would take you 557 months to pay off your balance — that’s more than 46 years. You would also pay over $24,000 in credit card interest during that time, or more than three times what you originally charged.
But what about a lower credit card balance? What if you owed $1,000 instead of $6,501? And what if your minimum was 1% of your balance, not 2.5%? In this case, your total interest payment would still be greater than the original charge. Paying the minimum on a $1,000 debt with a 24% APR would take you 125 months to pay off the balance, incurring $1,332 of interest within that time.
Paying the minimum on your rewards credit card can wreak havoc on your personal finance goals, and you don’t deserve that. And while it can be tough to tackle a mountain of credit card debt, there is help if you need it.
One potential way to reduce your credit card debt is to take advantage of a 0% APR credit card offer. These credit cards will typically let you transfer a balance from a high-interest credit card to one with an introductory period of no interest. You can then use the money you’re saving on interest to pay down your balance faster. Once the period of 0% interest ends, however, the card’s go-to APR will apply to your balance. You’ll also pay a balance transfer fee, which could be 3%-5% of the amount you’re transferring.
In the meantime, stick to using cash or a debit card as you work to pay down your debt. Adding more to your balance will only increase how much interest you’ll pay in the long run, making it more difficult to pay it off. Keep yourself on a budget and save those rewards credit cards for a later time, when you can enjoy their perks without the costly consequences.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
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