Rewards vs. interest
Last reviewed
Cashback, points, and miles are real value, but only if interest and fees don’t erase them.
Earning a few percent back while carrying a balance at a typical purchase APR means you’re paying far more than you earn.
Rewards are profit only when you pay in full and skip the fees.
A single month of interest at 24.99% costs $20.54, against $20.00 earned - so the reward is gone before the statement even arrives, and every further month is pure loss. The cashback is paid once; the interest is charged again every cycle the balance stays. That is why the earn rate is the wrong thing to optimise while a balance is being carried.
The arithmetic that decides it
Rewards are a percentage of what you spend, paid once. Interest is a percentage of what you owe, charged every day until the balance is gone. Those two things are not comparable at the same rate, which is why a 2% card and a 24.99% APR are not a close contest the moment a balance is carried.
The break-even is easy to state: rewards win only while the balance is cleared in full every cycle. Once it is not, the interest on what remains outruns the cashback on new spending at almost any rate an ordinary card pays. The example above shows one month doing exactly that.
Annual fees, caps, and the rest of the cost
Interest is not the only thing that erodes a reward. An annual fee is a fixed cost that has to be earned back before the card pays anything at all, so the question is how much category spending it takes to cover it - below that figure, a no-fee card at a lower rate is worth more.
Bonus caps do the same thing more quietly. A rate that applies only to the first fixed amount of spending each month or quarter is a different rate once that cap is spent, and a card chosen on the headline number keeps being used at its base rate long after it stopped being the best card for the purchase.
Foreign transaction fees belong in the same list. A card paying 2% back that charges 3% on overseas spending is losing money abroad, however good the headline rate looks at home.
Common questions
Are credit card rewards worth it if I carry a balance?
Almost never. Earning 1.5% cashback while paying a 24% APR means the interest costs roughly sixteen times what the rewards return. Rewards are calculated once on what you spend; interest compounds on what you owe. Clearing the balance beats optimizing the rewards rate every time.
When is an annual fee card worth paying for?
When the rewards and benefits you will actually use exceed the fee, and you pay in full each cycle. Divide the fee by your rewards rate to find the spend you need to break even - a $95 fee at 2% back needs about $4,750 of annual spend before it pays for itself.
How much interest cancels out my cashback?
A single month of carried balance usually erases a year of rewards on that spend. At 1.5% back and a 24% APR, roughly one month of interest costs more than the cashback earned on the same amount. CardLab shows the exact crossover point using your own APR and balance.