Here’s Why You Should Never Chase Rewards if You’re Still in Credit Card Debt

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Credit card debt is all-too-common in the United States. Collectively, Americans have $1.129 trillion of it, according to credit card debt research by The Motley Fool Ascent.

It’s not an insurmountable issue. Even if you have a lot of credit card debt, you can get rid of it by making it a priority and paying as much as you can. But some people make this much harder on themselves than it needs to be, because of one key mistake: They split their focus between paying off debt and earning rewards.

Earning points or cash back is always tempting. When you’re in credit card debt already, it could keep you there much longer and at a much higher cost.

The math doesn’t work out in your favor

With rewards credit cards, you can generally expect to earn 1% to 2% back on purchases. Some cards have bonus categories where you can earn more than that, but not all your purchases will be in those areas.

To make it easy, let’s say you spend $30,000 per year on a card that earns 2% back. You’ll end up with $600 in cash back — a great return, if your credit card isn’t costing you anything. If you’re paying interest, it’s a different story.

The average credit card interest rate is 22.77% on interest-bearing accounts (credit cards that charge interest, which excludes cards charging a 0% intro APR). That’s a whole lot more than the 1% or 2% you can earn in rewards.

Let’s say your credit card balance is right at the national average of $6,501. If you carry that balance for a year, it will cost you $1,480 in interest. Even if you’re earning rewards, you’re still losing quite a bit of money.

You’ll be pulled in two opposite directions

Chasing rewards while you have credit card debt isn’t just a problem for mathematical reasons. You’re also trying to do two things that are at odds with each other.

Rewards incentivize spending money. That’s why card issuers offer them. They know that people love earning points and sign-up bonuses, and that these benefits will drive many cardholders to spend more. Even if you don’t spend more than usual, the only way to earn rewards is to use your credit card.

Paying off credit card debt goes faster when you reduce your spending. It’s also much easier to do if you stop using your credit cards entirely and use your debit card instead. That way, you’re not adding to your balances anymore.

Part of the reason some people stay in credit card debt for so long is because they keep using their cards. This slows down your progress. Even as you’re paying down your debt, you’re also adding to it every time you make a purchase.

Get out of debt first and save rewards for later

You can save money thanks to credit card rewards — but only if you’re not paying any interest. For that reason, it’s better to pay your credit cards down to $0 first.

The most effective way to get out of credit card debt is to pay as much as you can toward it. Here are a few tips that can help with this:

• Look for expenses that are easy to reduce, such as going out to eat or streaming subscriptions. Cut back where you can and redirect that money toward your debt.
• Try a budgeting app to see exactly where you’re spending and more opportunities to save.
• Pick up extra hours at work or add a side hustle to increase your earnings. Add that extra income to your monthly credit card payment.
• Come up with an amount you can commit to paying every month, such as $500. Always pay at least this much, and if you can, pay even more.

If you have a good credit score, you could also check out balance transfer credit cards. These have a 0% intro APR on balance transfers. You can transfer over your debt and pay it down at the 0% introductory rate. They don’t pay off your debt for you, but they can help speed up the process and save you money on interest.

Once you’re out of debt, get into the habit of always paying your credit card bills in full. If you do this, you won’t be charged any interest. When you’ve made it a habit, then it’s a good time to start focusing on earning rewards.

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