The deceptive math of credit card rewards: Spending for points doesn't always make sense

Everyone feels like they’re getting a freebie when they cash in those credit card rewards, but those “freebies” may actually be costing you more than you realize, a new study shows.

Two-thirds of Americans with credit card debt still try to maximize credit card rewards, which often come in the form of miles, points or cash back, according to Bankrate, a financial products comparison site. Bankrate surveyed 2,239 adults, of whom 1,740 were credit cardholders, between Jan. 24 and 26.

However, that’s a losing strategy for consumers, said Ted Rossman, Bankrate’s senior industry analyst.

"Chasing rewards while you’re in debt is a big mistake,” Rossman said. “If you have credit card debt — and no shame, a lot of people do — it’s so important to prioritize your interest rate.”

The math behind the rewards when you have credit card debt

Credit card interest rates are at an all-time high, the Consumer Financial Protection Bureau. The average annual percentage rate (APR) on credit cards — or the interest firms charge their borrowers — soared to a record 22.8% in 2023 from 12.9% in 2013, it said.

Learn more: Best credit cards of 2023

Meanwhile, the typical rewards payout is in the 1 to 5% range, Rossman said. “It doesn’t make sense to pay 20% or more in interest just to earn 1, 2 or even 5% in cash back or airline miles." You may end up paying more in interest than if you had just purchased an airline ticket, for example.

Besides, airline miles may not be worth hoarding anyway. They’ve essentially become cash because of how airlines have increased the miles you need in line with the cost of a ticket, said Michael Ashton, managing principal at Enduring Investments, who found one airline mile on United equals 2.5 cents.

“Your best strategy is to spend them as quickly as you can,” he said. “They don’t earn interest, so they are a wasting asset.”

Credit card debt climbs:Graphics show how Americans' total credit card debt reached record high

Sometimes credit card debt is unavoidable

Of course, some people turn to credit cards because they must. In those cases, go ahead and earn rewards but try to choose a card that fits your lifestyle to get the maximum benefit.

For example, groceries and gas can be top rewards-earning categories and a cash-back card could help you earn rewards in the form of a statement credit or check to put toward debt repayment. Debt repayment or avoidance should always be your number one priority, Rossman said.

Don’t spend money on your credit card just to earn rewards or overspend, which is particularly easy to do with credit cards. Studies show that people tend to spend more when they pay with credit cards. A 2016 study by the Federal Reserve Bank of Boston showed the average value of a cash transaction was $22, compared with $112 for noncash transactions.

Who are the biggest rewards chasers?

By generation, Gen Z (77%) leads the chase for rewards, followed by 74% of millennials. Gen Xers and Boomers tied at 69% Bankrate found.

By income, 77% of households that earned $100,000 or more annually maximized rewards compared with 75% earning $50,000 to $79,999, 70% earning $80,000 to $99,999 and 68% earning under $50,000, the survey said.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.