Balancing Credit Card Rewards with Low APR
How to ensure you use credit strategically to avoid problems with debt.
Using credit as effectively as possible can be a fairly delicate balancing act – especially if you’re trying to take advantage of rewards like travel miles or cash back. You want to maximize your rewards, but you also don’t want to pile on a lot of extra added interest. So how do you strike the right balance between earning the rewards you want and keeping interest charges on purchases to a minimum?
The information in this section is intended to help you get the most out of using your credit cards for the least amount of interest added. But this kind of strategy only works if you’re on track with your budget. If you’re struggling with debt already, then you need to regain control before you can implement any of the tips below. Call us or fill out the form to the right to get started.
Be strategic about which credit card you use on every purchase
Most people have more than one credit card – and that’s typically because those cards serve different purposes with various benefits and advantages. With that in mind, you need to use each credit card you have to its greatest advantage. This means maximizing your rewards strategically, while keeping an eye on your interest rates.
So let’s look at an example scenario:
- You have five credit cards:
- A travel miles reward card
- A cash-back card with higher percentage back on certain purchases set each quarter
- A cash-back credit card with a lower percentage cash back on all purchases
- A low APR credit card
- A gas card
In this situation, the consumer should check the first cash back rewards program each quarter to see where they can earn the most rewards. This doesn’t mean you make up things to purchase at those places, but you plan your budget strategically around the rewards being offered.
So if you have a D-I-Y project for your house that you’ve been putting off and a home improvement store comes up in on the rewards list, it may be a good time strategically to make those purchases. If the reward the next quarter is for department stores, you make clothes purchases you’ve been delaying and/or purchase gifts for the holidays.
Following this, any purchases for gas or incidentals purchased at a gas station should go on the gas card. Then all other credit card purchases should be split between the other three cards. If you make a purchase that you know can be paid off quickly, it can go on the low-percentage cash-back or travel rewards card. Any larger purchases should go on the low APR credit card.
Paying off balances every month to avoid interest
The critical thing to remember with rewards credit cards – whether they give you cash-back, travel miles or gas station incentives – is that they almost always come with higher interest rates. So it’s important to pay off credit card debt on rewards cards as quickly as possible. Ideally, you should pay off the full balances on your rewards cards every month.
- All credit cards have what’s known as a grace period.
- If you start a billing cycle with a zero balance, then any charges made during that cycle will not have interest charges applied until the end of the billing cycle.
- So if you pay off the balance in-full before the end of the grace period in the billing cycle, then no interest charges get applied to those transactions.
- However, if you start the billing cycle with a balance – even if that’s only $10 – then every purchase you make gets interest applied from Day One.
This is why your rewards cards should always be paid off completely every month, so you maximize the rewards and don’t offset that advantage with higher levels interest added. Think about it, if you earn 5 percent cash back on a purchase, but you pay 15 percent interest on the same purchase, then you really didn’t gain anything. In fact, you lost.
The value of low interest on large purchases
So one thing you don’t want to do when you’re using credit strategically is build up a large amount of debt on a credit card with one of your higher interest rates. With that in mind, large purchases that can’t be paid off quickly should always be put on your credit card with the lower interest rate. That way, you’ll save money in the long-run because interest won’t build as fast on your debt before you get it paid off.
You purchase a 65” Ultra HD TV for $2499.99. About how much total interest will you pay on this debt if your credit card has 15% APR on a standard 2% minimum payment schedule?
Tip: If the same debt were put on a credit card with 12% APR, you would only pay about $2,045 in total interest charges making only minimum payments
With this in mind, anytime you know you’re not going to pay off your balance quickly (ideally within the first month), you need to use your credit card with the lowest interest rate. This includes big-ticket purchases like electronics and furniture. But it also includes times when you know you’ll be making a large number of smaller purchases all at once.
So, for example, winter holiday and back to school purchases may be better off on a low-interest credit card, since it may take you a few months to pay off the debt generated during these expensive shopping seasons. That way, your gifts and back-to-school supplies won’t end up costing twice as much with interest added.
Doing the math on travel miles
Another way people waste money with credit card rewards is through their use of airline miles. If you have a credit card that earns travel miles for purchases, you want to make sure you use those miles when it will benefit you the most.
Fact: A frequent flier mile is worth about 1-2 cents.
Consider that most airline reward programs require you to use a minimum of 25,000 miles for a basic restricted ticket. So in currency terms, that’s a ticket between $250 and $500. With that in mind, if you can purchase fare on a trip for less than that amount, then it’s probably not worth it to use your miles.
Think of it this way. If you want to fly from New York to Miami during a non-peak season on a weekday, the ticket will cost you about $175-$250. So using airline miles in this case doesn’t made sense, because the value of the 25K miles you have to use is actually more than the price of the ticket. So in this case, you should save your miles for a bigger trip (like an international flight) and pay for this short flight another way.
Understanding purchase acceleration
The final piece of strategic credit use comes with your ability to avoid purchase acceleration. This is where you use a particular credit card to make purchases just for the purpose of earning rewards. This most commonly happens with reward credit cards that change quarterly and/or cards with a tiered reward system.
Basically it works like this: Let’s say you have a credit card that has a tiered reward program, so if you want concert tickets, you have to earn a certain number of reward points before you become eligible for that particular reward. So in order to get the reward, you start making purchases on that credit card just to hit that level that you need. You’re basically making all of your purchases cost more with interest added for concert tickets that would probably cost you an equal amount if you bought them outright. This doesn’t help your bottom line!
The same is true if you have a rewards program that changes over do a different set of businesses or merchants every quarter. If you start making purchases that weren’t in your budget at a certain store just because you can earn 5% cash back, that’s not really helping. After all, 5% cash back on an expense you didn’t need is still wasting the other 95% of the money you spent (not including added interest, of course).
Instead, you have to be strategic with your cards to plan purchases you need to make anyway around the rewards being offered at that time. So if you’re having a date night with dinner out and you have a credit card that earns rewards at a certain restaurant, then it makes sense to eat there because you were going to spend the money anyway – this way you at least get something for the money you spent.