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Dear Cashing In,
I’m probably going to be adding to my credit
card balance this year for Christmas. I’d like to be able to get rewards for
all the spending. What’s the best card with a low interest rate that also has
good rewards (cash back)? – Joan
There are plenty of ways to earn rewards on holiday
shopping. Obviously, any spending that you put on a rewards card earns rewards.
Sometimes you can boost these rewards by having the right card. For example,
the Chase Freedom card this quarter is offering 5x rewards for spending at
Walmart and department stores – which are good places to grab holiday gifts.
There are other ways to boost your points, too, such as by
using online shopping portals. They can give extra points for merchandise
bought online. In addition, you can often use your points to buy presents.
However, as tempting as it is to want to earn rewards on all
your additional holiday spending, you absolutely should not focus on rewards if
you are carrying a balance or will not be able to pay off your cards in full at
the end of the month. For starters, reward cards tend to have higher interest
rates than cards that don’t. According to the Nov. 22, 2017, CreditCards.com Weekly
Credit Card Rate Report, rewards cards charged an average of 16.24 percent
interest, higher than the overall average (see current card rates). Low-interest cards weren’t too much
lower, at 12.89 percent.
In contrast, the rewards you can earn from cards typically
do not average much higher than 2 percent. The highest flat-rate cash-back
cards come in at 2 percent. Category bonuses can sometimes be as high as 6
percent, although there is no way to fit anywhere close to a majority of your
spending into that high of a bonus category.
If you were to spend $500 on a cash back card that gives 2
percent back, that would be worth $10 in rewards. But if you don’t pay off the
balance in full on that card, the interest charges on that $500 a card with a
16 percent APR would be around $86 for the year (compounded monthly). You do
come out slightly ahead if you carry the balance for only a month, but trying
to outperform high interest rates with relatively meager rewards is a dangerous
game you’re likely to lose.
A better move would be to set aside the temptation to earn
rewards for now and to find a low-interest
card or one with a 0 percent introductory offer. Some cards, such as the
Chase Freedom, Discover It, and American Express EveryDay cards have no annual
fees and limited-time 0 percent offers on purchases while also offering some
rewards. Again, it is best not to focus on the rewards but rather find a way to
minimize your interest expense if you are carrying a balance.
The best advice, though, is to try to align
your spending with your income so you don’t go into debt in the first
place. This isn’t always possible, and it can be hard work. But avoiding credit
card debt can give you financial peace of mind – which sounds like a fine
present for the holidays.
See related: How to maximize credit card rewards while holiday shopping, Rack up card rewards with holiday bonuses, perks
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