When does cashback lose to interest?
3 min read · Which card, Card mechanics
Cashback is paid once on what you spend, and interest is charged every day on what you still owe. On a balance you carry for a full month, a purchase APR in the high teens or twenties costs more in that single month than a typical rewards rate pays on the same amount, and it keeps costing it every month after. While you are carrying a balance, the cheapest card to borrow on beats the card with the best rewards.
Rewards and interest are quoted in the same unit, which makes them look comparable. They are charged on different things, at different frequencies, and that is where the comparison goes wrong.
Two percentages that are not alike
A reward is a percentage of what you spend, paid once, on the day you spend it. Interest is a percentage of what you owe, and the CFPB describes how it lands: "Many credit card companies calculate the interest you owe daily, based on your average daily account balance." 1 That method has a page of its own, because the average is what you are charged on rather than the closing figure: see how average daily balance interest works.
One is a single event. The other is a rate applied to every day the money is still outstanding.
A dollar vignette
Example numbers for the math, using the 2% reward and the published Chase Freedom Flex purchase APR range already cited on this page, a variable "18.24% and 29.99%". 2
Take a $1,000 purchase you carry for a full month.
| Side | Math | Result |
|---|---|---|
| Cashback at 2% | $1,000 times 2% | $20 once |
| Interest at the published low end | $1,000 times 0.1824 over 12 | about $15.20 in month one |
| Interest at the published high end | $1,000 times 0.2999 over 12 | about $24.99 in month one |
At the high end of that published range, one month of interest already exceeds the cashback. At the low end, interest catches the $20 reward in roughly a month and a half, and then keeps charging every month after while the reward does not. That is why, while you carry a balance, the cheapest card to borrow on beats the card with the best rewards.
The grace period is the part that actually decides it
While you pay the statement balance in full, purchases are interest-free and the rewards are real money. The CFPB puts the condition plainly: "If your card has a grace period, you can avoid paying interest on purchases if you pay off your balance in full by the due date each month." 1
Lose that and the arithmetic changes shape rather than degree. The same guidance notes that interest accrues daily, so "if you don't have a grace period, the sooner you pay off all or some of your balance, the less interest you will pay". 1
Without a grace period, a new purchase starts accruing from the day it posts. Its cost is the price plus everything it accrues before the balance clears, against a reward fixed at a couple of per cent.
Which question to answer first
There is an order to this, and reversing it is the common mistake.
- Am I clearing the statement balance every month?
- If no, which of my cards is cheapest to borrow on?
- If yes, which of my cards pays most for this category, with room under its cap?
That last condition moves during the period, because a spent cap drops the card to its base rate: see when your bonus category card stops winning.
Question 3 is the enjoyable one and it is the one most tools answer. It is worth nothing while the answer to question 1 is no, because a few per cent earned cannot outrun a rate several times larger charged on a larger number every day.
What a ranking has to know
A card ranking that does not ask whether you are carrying a balance will confidently hand you the wrong card. It will name the highest earn rate in the category while the account it is naming charges you more in interest than the rate pays.
This is why CardLab asks about the balance before it ranks anything, and why it will decline to name a winner and say that paying by card costs you money here. A ranking that cannot say that is optimising the smaller of the two numbers.
Common questions
Is it worth using a rewards card if I carry a balance?
For the rewards, no. A reward is a small one-off percentage of the purchase and interest is a larger percentage of the balance repeated every month, so the interest overtakes the reward quickly and then keeps going. Use whichever card has the lowest purchase APR, and treat any rewards it earns as incidental.
Does paying the minimum keep my grace period?
No. The grace period depends on paying the statement balance in full, not on staying current. Paying the minimum keeps the account in good standing and still loses the interest-free window on new purchases.
How do I get the grace period back?
By paying the statement balance in full again and, at most issuers, keeping it that way for a further cycle. Until then new purchases can accrue interest from the day they post rather than from the due date.
Should I stop spending on the card entirely?
You can keep spending, provided you know what a purchase costs while the grace period is gone. Without it, a new purchase starts accruing interest immediately, so its real price is the sticker price plus the interest it accrues until the balance clears.
Sources
CardLab tracks the cards you hold and the bonuses you are chasing, with every rate read from the issuer's own page.
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