Credit card rewards.
In plain English
Credit card rewards return a slice of your spending as cash back, points, or airline miles. The money comes largely from interchange, the fee merchants pay to accept card payments, which is partly passed back to you. Rewards are real value on spending you would do anyway, but they only pay off if you clear the balance every month: carrying a balance means interest that dwarfs any reward. Premium cards add perks and annual fees, so the math depends on whether you use enough of the benefits to beat the fee.
01Why it matters
Rewards are worth real money on planned spending, but a single month of carried interest can wipe out a year of rewards, so they only help if you pay in full.
02The math, step by step
A 2 percent cash-back card returns 2 dollars per 100 dollars spent, or about 400 dollars on 20,000 dollars a year. Carry a 2,000 dollar balance at 24 percent, though, and the roughly 480 dollars of yearly interest erases it.
03What this is NOT
Rewards are NOT free if you carry a balance. Interest on a revolving balance almost always costs more than the rewards return, so they only come out ahead when you pay in full each month.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice