‘Interest rates far outweigh rewards,’ Ted Rossman, Bankrate senior industry analyst, says.
A new study provides a note of caution for Americans who are tempted by credit card rewards.
According to a Bankrate
survey, released on March 24, the majority (72 percent) of people who are currently in debt to credit card companies, often paying interest rates of 20 percent or more, say they were “chasing rewards,” such as free flights, free hotel stays, upgrades, cash back, or other accumulated benefits.
For those who can pay off credit card balances in full each month, using their cards to accumulate flyer miles and other perks might bring benefits. But analysts warn that for many Americans, this is a bad trade and risks getting them trapped in expensive debt that they will struggle to get out of.
“The main takeaway here is that interest rates far outweigh rewards,” Ted Rossman, Bankrate senior industry analyst, told The Epoch Times. “If you’re among the 44 percent of cardholders who carry debt from month to month, pursuing rewards is not worth it.”
According to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit for the fourth quarter of 2024, Americans’ aggregate credit card balances increased by $45 billion over the previous quarter, reaching $1.21 trillion by the end of December. In addition, those who were “seriously delinquent,” or more than 90 days late in credit card payments,
increased from 6.36 percent in the fourth quarter of 2023 to 7.18 percent in the fourth quarter of 2024, the Fed reported.
The Bankrate survey also indicated that the younger the person, the more likely they were to run up credit card debts in pursuit of rewards. Eighty-nine percent of Gen Z cardholders (ages 18–28) and 85 percent of millennial cardholders (ages 29–44) responded that they chased credit card rewards, compared to 78 percent of Gen X cardholders (ages 45–60), and 72 percent of baby boomers (ages 61–79).
This could be because the younger generations are used to taking on more debt for things like student loans, or have had less schooling in financial literacy, or have a greater appetite for financial risk.
According to a 2023 generational survey of financial attitudes by the CFA Institute, Gen Z is often tempted by more volatile opportunities like buying cryptocurrencies, as well as a “fear of missing out.”
“For Gen Zs, there seems to be a correlation between gambling and investing—particularly high-risk investing,” the CFA Institute reports. Gen Zs say they are also more likely to rely on assistance from family members when they get into trouble.
Those who end up running a balance on credit cards, however, may have regrets.
“Over the course of the year, a 20 percent interest rate means that for every $100 you’re carrying, you’re paying $20 in interest,” Rossman said. “Let’s say you’re getting 5 percent cash back, which is on the high end; even there, you can see how you’re falling further and further behind.”
“In that case, you really should prioritize debt payoff,” Rossman said.
One strategy to get a handle on card debt is to transfer outstanding card balances to the lowest interest rate cards you can find, and then focus on paying down the outstanding debt with the help of that interest rate savings.
“Those cards sometimes don’t offer rewards, but that’s okay,” Rossman said. “Your reward is getting out of debt as quickly as possible at the lowest interest rate possible.”
Many Americans are resorting to running up credit card balances to pay for essential items like food, gas, and electricity bills. According to the New York Fed, total household debt in the United States increased by $93 billion in the fourth quarter of 2024, to reach $18.04 trillion, and much of this is taking the form of credit card debt.
According to a Bankrate
survey in October 2024, 37 percent of American credit card holders have maxed out or nearly maxed out on their card limits. In addition, running up high credit card balances can hurt your credit scores, driving up the cost of debt even further.
Experian, a consumer credit-rating company, states that your personal debt level comprises about 30 percent of your overall credit score, which also takes into account your history of paying bills on time and other factors. A significant component when rating personal debt levels is a person’s credit-utilization rate, or the percentage of available credit that is tied up in outstanding balances.
“Avoid the cards for a while,” Rossman advised.
“Pay them off using some of those strategies, whether it’s balance transfers or nonprofit credit counseling or even just taking a side hustle or selling stuff you don’t need,” he said. “It doesn’t have to be forever, but you do that for six months or a year and you can make meaningful progress, and then hopefully be free from that debt moving forward.”
