One of my favorite topics in financial literacy is credit cards and their tempting rewards. I've heard it all from clients. "It's worth it because I get cash back! It'll help pay the bill!", "I've got that trip coming up, it only made sense to put the new couch on my travel card", and "I'll have the money when it comes time to pay the bill". These companies know what they're doing and love to lure you in with these tricks. They hope that you aren't planning for paying the bill, and solely focus on some future reward.
So which credit card has the best reward? Without further ado.... 🥁
The best credit card to use is the one you can pay off in full when the bill comes.
I know it probably wasn't what you were thinking. Let's do some math, shall we?
Here we have the Citi Costco Visa, a popular one for my clients. This card offers 4% back on gas, 3% back on restaurants & travel, 2% back on Costco purchases and 1% back on everything else. Each of these are real client examples based off of an interest rate of 20.49%.
Scenario 1: $1,300 transaction earning 1% cash back
$13 earned but $22.07 interest charged= $9.07 lost to interest immediately
Scenario 2: $100 Costco transaction earning 2% cash back
$2 earned but $1.70 interest charged= $0.30 earned month one
All rewards lost to interest by month two
Scenario 3: $40 gas transaction earning 4% cash back
$1.60 earned but $0.68 interest charged = $0.92 earned month one
All rewards lost by month four
Each month you carry a credit card balance, your rewards get eaten up. Will you still get your full rewards? Of course. The credit card company wants to take your money from interest payments AND make you think you're coming out ahead. Would you rather the company pay for your rewards or you pre-pay them with a high interest rate? That's what I thought.
The next time you're debating putting a purchase on a card for rewards, do some math to see how much it will really earn you. Reach out to me if you'd like help with this!