Debt Help Getting Rid of Debt

Should You Use Credit Card Rewards to Help Pay down Debt?

If you’ve got a rewards credit card in your wallet, you probably already know that it’s a great way to earn bonuses on the things you buy. When you’re using them responsibly, these cards will not only save you money but you can turn those rewards into extra payments towards your student loans, car loan or monthly mortgage payment.

Using credit card rewards to pay down debt isn’t without certain risks, however, so before you decide to try this strategy here are the most important things to keep in mind.

It’s Not Worth It If You Carry a Balance

Putting your credit card rewards to work to get rid of debt isn’t really that effective if you’re creating new debt in the process. For instance, if your plan is to use your card to earn cash back that you can slap down on your student loans, you should only be charging what you can afford to pay off at the end of the month.

If you’re building up a balance on credit cards for the sake of paying down your other debts, those rewards are virtually worthless in the long run if you’re shelling out interest on the things you charge.

Charging $1,500 a month to a card that offers 3 percent cash back makes no sense if you’re going to be paying 15 or 18 percent in interest on the balance.

Unless you’re confident that you’ll be able to pay your card off in full each month, you’re better off developing a payoff plan based on your income rather than running the risk of adding to your debt to chase rewards.

Not All Rewards Cards Are Created Equally

Being responsible with how you use your credit cards to earn rewards is important but you shouldn’t assume that just any card is right for what you want to do. Some cards, for instance, pay you points on purchases. Others pay you a set amount of money back on what you spend or miles that you can use for travel.

In most cases, you have some flexibility with how the rewards you’re earning can be redeemed. For instance, you may be able to use your points to book a flight, trade them in for gift cards or swap them out for cash.

If you’re using the rewards to pay down debt, you should be using a card that pays cash back directly or allows you to convert your rewards to cash.

The other thing to keep in mind is that many rewards cards charge an annual fee, which can eat away at the amount of rewards you’re earning. If you have a card that pays 3 percent cash back but charges an annual of $75, you’d need to spend $2,500 before you’d break even.

Be Realistic About Your Expectations

Getting out of debt often requires a long-term investment of time and money, not to mention a big helping of patience. Using your credit card rewards to chip away at the totals can speed things up a bit but you shouldn’t assume that it’s going to be a magic bullet.

Before you jump on the rewards bandwagon, you need to run the numbers to figure out what the return is going to be to make sure it lines up with your goals.

For example, let’s say you want to earn an extra $300 per year to put towards your mortgage. If your card pays 3 percent back, you’d have to charge $10,000 over a period of 12 months to hit your mark and that doesn’t include what you’d have to spend to cover the annual fee.

If your card only pays 2 percent back, the total jumps to $15,000.

That’s a lot of money you’re putting on plastic for the sake of a few hundred extra dollars. If you normally spend that much anyway for business or personal expenses, it’s not such a big deal but to the average person that’s a big number.

In the end, you might benefit more from putting your time and energy into starting a side hustle or working part-time.

Don’t Forget About the Impact on Your Credit

One last consideration is how using a rewards card to pay down debt is going to affect your credit rating. Your credit utilization ratio is the amount of debt you owe versus your total credit line and the higher your ratio, the more negatively it affects your credit score.

If you’re charging up your card each month and paying it off, that can hurt your utilization ratio temporarily. On the other hand, if you get stuck carrying a balance it can drag your score down over the long term.

Even if you’re not planning on applying for a loan any time soon, good credit still counts when you’re paying off debt, especially if you’re using credit card rewards to do it. If your score is constantly going up and down, your card issuers may decide to lower your credit limit.

That can knock even more points off your score and effectively limit the amount of rewards you can earn to pay off debt.

The bottom line? When you’re trying to turn credit card rewards into debt repayment dollars, you need to tread carefully. Otherwise, you could be wasting time and costing yourself money in the process.

About the author

Rebecca Lake

Rebecca Lake is a personal finance writer and blogger specializing in topics related to mortgages, retirement and business credit. Her work has appeared in a variety of outlets around the web, including Smart Asset and Money Crashers. You can find her on Twitter at @seemomwrite or her website, RebeccaLake.net.

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