When the rewards cost more than they pay

Pay the statement balance in full by the due date and purchases cost you no interest at all. Miss it once and the free window can close.

Called

The grace period, typically at least 21 days between statement close and the due date.

How you lose it

Carry a balance and many issuers suspend the grace period, so new purchases start accruing interest from the day you make them — not from the next statement. Getting it back usually means paying in full for a full cycle or two.

Never covered

Cash advances have no grace period at all. Interest starts immediately, usually at a higher rate, plus a fee.

Not on what you owe at the end of the month. On the average of what you owed each day, compounded daily.

Called

Average daily balance method, using a daily periodic rate of your APR divided by 365.

Why it matters

Paying earlier in the cycle reduces the average, and therefore the interest, even if the total you pay is identical. A mid-cycle payment is not wasted.

Compounding

Daily compounding is why the effective annual cost of a 22.15% APR is slightly above 22.15%.

A 2% card returns $20 on $1,000 of spending. At 22% APR, carrying $1,000 for a year costs about $220. The rebate does not survive the contest.

The arithmetic

Rewards are earned on what you spend. Interest is charged on what you owe. Once the balance you carry approaches a tenth of your annual spending, the interest generally overtakes the rebate. The calculator below runs your own figures.

Annual fees

Subtract the fee before judging a rewards rate. A card with a fee needs enough spending in the bonus categories to clear it before it beats a no-fee card.

Point values

Points and miles are worth whatever the issuer decides, and that can be changed without your agreement. Cash back cannot be devalued.

Promotional rates run 12 to 21 months. Whatever is left when the clock stops reverts to the standard APR.

Transfer fee

Typically 3% to 5% of the amount moved, charged up front. That is $300 to $500 on $10,000, before any saving.

Payment allocation

Issuers must apply anything above the minimum to the highest-rate balance first. If you spend on a card holding a 0% transfer, the minimum payment may not touch the promotional balance.

The plan

Divide the transferred balance by the number of promotional months and treat that as a fixed obligation. If the result is unaffordable, the transfer only postpones the problem.

Usually the month's interest plus about 1% of principal. It is the smallest amount that keeps the account current, not a repayment plan.

What it produces

On an $8,500 balance at 22.15%, minimum payments take over twenty years and cost more in interest than the original balance.

Required disclosure

Your statement must show how long minimum payments would take and what a three-year payoff would cost instead. It is on the first page.

See it worked through

The debt options guide has a calculator that compares the two.

The share of your limit you are using is one of the biggest score inputs, and issuers usually report your statement balance rather than what you paid.

The quirk

Paying in full every month can still report high utilisation, because the figure sent to the bureaus is the balance on the statement date. Paying before the statement closes reports a lower number.

Closing cards

Closing an unused card removes its limit from the total, which can raise utilisation even though your spending has not changed.

Checking

Your reports are free at annualcreditreport.com, and checking them yourself is a soft inquiry with no effect.