Credit cards pull in $176 billion every year from rewards programs, and about 86% of these interchange fees actually get passed back to cardholders as points and cash back. That sounds like a great deal for consumers. Well, it’s not that great. Premium travel cards run between $450 and $695 a year, and studies consistently show that rewards programs cause us to spend 12-18% more than we normally would.
Once we break down the math and factor in all the fees and the extra spending these programs cause, we can calculate down to the penny what each reward transaction is actually costing you. The formula is simple enough to show you if your cards are making you money or costing you more.
Here’s the math so you can see what rewards actually cost you!
Most rewards credit cards have an annual fee, and this number usually jumps out at you first because it’s the easiest cost to see. A premium travel card is going to run you somewhere between $450 and $695 per year, and a basic cashback card usually costs anywhere from nothing at all to around $95. The card issuers put these numbers right in the terms and conditions when you fill out your application.
Annual fees are just the beginning, though. Interest rates are where the biggest costs come from for most cardholders. The average American is carrying around $6,000 in credit card debt, and with APR rates hovering near 20%, we’re talking about $1,200 in interest charges annually. That amount easily exceeds whatever rewards you’d earn in a year, unless you’re someone who pays off the entire balance every month.
Opportunity cost also deserves some attention. Any dollar that goes toward earning rewards is a dollar that isn’t available for other investments or purchases. The hours add up as well – all that time spent on bonus category research and points tracking might not seem like a big deal in the beginning. But eventually, you realize that entire weekends have disappeared into spreadsheets and reward optimization strategies.
Plenty of costs sit right out in the open. Foreign transaction fees will eat away at any travel rewards you’ve accumulated pretty fast. Balance transfer fees can wipe out a few months’ worth of cashback earnings in one shot. The mental load alone (always having to remember which card works best at which merchant) has some value too!
My goal isn’t to scare anyone off from signing up for a rewards card. What matters is having all the information laid out so you can decide if a particular card actually fits your financial situation. It’s much easier to find out which cards will actually save you money and which ones won’t.
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What Rewards Programs Really Cost You
Most rewards programs are designed to make customers spend quite a bit more money than they originally planned to spend. Recent research into consumer behavior shows that the average person will increase their spending somewhere between 12-18% when they’re actively trying to earn rewards. Customers have been known to spend 23% more each month in some cases, with the extra spending aimed at hitting those tempting bonus thresholds that the credit card issuers dangle in front of them.
The biggest problem with these programs is the psychology behind how they work on your brain. Credit card issuers have taken a page straight from the video game industry’s playbook – they use the exact same tricks that developers have perfected to make players addicted and always coming back. You see that next reward tier or that bonus category just right there in front of you, and your brain lights up, and suddenly, you need to get there. Before long, you’re at the checkout counter with a cart full of extra items you didn’t plan to buy, all because you wanted those points.
A fascinating mental trick also happens when customers start to separate their rewards spending from their normal monthly budget. Behavioral economists have been studying this phenomenon for years, and what they’ve found is remarkable. Most of us create these different mental buckets for our money, and for some reason, the rewards bucket never quite seems like actual spending. We convince ourselves that everything we buy is actually an investment in future rewards. But then we completely forget to count the actual dollars that are leaving our bank accounts right at that time.
The hidden fees are another problem, and they accumulate quickly. Foreign transaction fees alone usually run about 3% each time you use your card outside the country. Balance transfers have their own set of costs that credit card issuers don’t usually mention in their marketing materials. And there’s the valuable time you spend as you manage multiple cards and try to track which bonus categories are active on which cards during which months.
Maybe the most expensive trap of all is related to those promotional interest rates that start at 0%. These rates always have an expiration date, and when that date arrives, cardholders can suddenly find themselves owing hundreds more each month in interest charges. The majority of customers never bother to mark their calendars with the exact date when the promotional period ends, and so they’re completely unprepared when the normal interest rate takes effect and their minimum payment shoots through the roof.
What Your Points Are Really Worth
The real value of your rewards points is where it gets a bit tricky, and to be honest, most cardholders have no idea what their points are actually worth. The same exact point can be worth drastically different amounts based on what you do with it. Airline miles are a perfect example of this variability. A single mile might get you 1.2 cents of value if you book a standard flight. But that same mile drops down to just 0.7 cents in value if you choose to redeem it for merchandise in their rewards catalog.
This becomes even more frustrating when you realize that these values are changing all the time. Big rewards programs across the board slashed their redemption values by between 15% and 20% just between 2023 and 2024. Any calculations you did last year about what your points were worth are completely outdated at this point. The only way to know what you’re actually working with is to run the numbers again with today’s redemption rates.
The way you choose to redeem has a massive effect on value, too. Points that are transferred directly to airline partners usually deliver much better value than the same points would get you through a credit card company’s own travel portal. Statement credits are almost always the worst deal you can get, but sometimes that’s all you have available, and you just need the cash.
Tiered redemption structures and blackout dates add a few more wrinkles that can hurt your value. Peak season travel might need double the usual points, and the only flights available during your vacation week cost 50% more miles than they normally would. The system seems to be built to make optimal redemption tough.
About 31% of all earned rewards points expire completely unused every year. 1/3 of the points that consumers work so hard to earn just vanish into thin air.
My advice is always to calculate the value based on your real redemption patterns – not some theoretical maximum you read about online. Pull up your last 5 redemptions and average out the value you ended up with from each one. That average represents your behavior and gives you a far more accurate picture of what your points are actually worth to you.
How to Calculate Your Card Costs
These variables we just went through actually fit into a pretty basic formula once you put them all together. The true cost of any rewards card works out to be your annual fees, whatever interest you wind up paying, and any extra spending that the card tempts you into, and those opportunity costs we talked about. From that total, you subtract the actual value of the rewards you redeem (not what the marketing materials claim they’re worth, but what you actually get out of them) multiplied by how frequently you use those rewards.
The formula works differently for different types of cardholders, and I see this all the time with customers. A frequent traveler with multiple premium cards might shell out $495 every year in fees. But they redeem so many points for business class flights and hotel upgrades that the fee ends up almost trivial in comparison. But cardholders who mainly want cashback for their weekly grocery runs have very different math to work through. They’re not working with airline partners or hunting for bonus categories, and their calculations are way simpler as a result.
The math gets especially revealing once you dig into those premium cards with big annual fees. A card with a $495 yearly cost probably needs you to spend around $25,000 annually until you even reach the spending tiers where the better bonuses kick in. For cardholders who only put $15,000 on their cards each year, the numbers just don’t add up favorably. No matter how you slice it, they’re losing money on that deal after accounting for whatever rewards they manage to earn. Credit card break-even math is simple. Take a 2% cash back card with a $95 annual fee – you’d need to spend $4,750 every year just to cover that fee. Fall short of that number, and the credit card company ends up ahead as you’re stuck paying them for a card that costs you money.
Another aspect most cardholders miss is how points slowly lose their value over time. Airlines are notorious for this – they adjust their redemption rates every couple of years, almost always in their favor instead of yours. Those points you’ve been saving for that big trip next year will be worth 20% less by the time you go to book those flights. Inflation compounds this problem and makes it even worse.
As for carrying a balance on your rewards card, well, that changes the entire equation immediately. The interest charges alone will obliterate any reward value that you could have earned. Just one month of interest payments can completely wipe out an entire year’s worth of cashback earnings. At that point, the rewards program is meaningless.
Make Smart Choices with Your Numbers
A solid place to start is with a hard limit on what you’re willing to pay. Some cardholders draw the line at $100 per year in net costs after all the rewards are figured in. Others want to see at least 2¢ of value for every dollar they spend on the card. The exact number doesn’t matter as much as having one and then using it to look at each card in your wallet.
Opportunity cost is something that really changes the game once you apply it to annual fees. Take a card with a $450 annual fee. Put that same $450 into a high-yield savings account and you’d earn about 5% or more without any effort at all. And investing that money year after year for a decade would lead to pretty substantial compound growth. Once you stack those sure returns against the reward points that you might or might not actually use, the comparison can be pretty eye-opening.
One of the hardest parts is canceling a rewards card, especially one that you’ve held for a few years. You’ve accumulated those points over time, you know how the rewards structure works, and it feels wasteful to just walk away from it all. Economists have a name for this feeling – the sunk cost fallacy. It keeps you locked into bad deals just because you’ve already put time and money into them.
Sometimes the smartest move is to switch to something simpler. A basic cashback card with no annual fee might actually put more money in your pocket than your complicated rewards program ever will. You won’t have categories to track, no booking portals to think about, and no blackout dates to work around. Unless you’re someone who spends heavily and maximizes every bonus category throughout the year, the simpler option usually wins out once you run the numbers.
Level Up Your Incentives and Rewards
Once you finally run the numbers on your rewards program and find out it’s actually costing you money, it is a letdown. The upside is that this realization puts you ahead of most cardholders who never bother to check. Credit card issuers rake in $176 billion annually, and the bulk of that revenue comes from customers who assume their rewards are worth more than what they’re paying in fees and interest. Plenty of high earners have already done this math, which explains why many of them stick with cashback cards with no annual fees over tricky point systems that need you to always optimize.
Your spending patterns will change, and rewards programs update their terms all the time, which means that it’s worth revisiting these calculations every few months. Once you start doing this every few months, something interesting happens. You go from being a person who gets swept up in marketing to someone who can tell quickly when a rewards program makes financial sense and when it’s just expensive window dressing. This same analytical way of thinking pays off when looking at other financial products as well.
Level 6 does incentive programs in a very different way, and we’ve built our whole business around programs that deliver genuine value that you can measure. We partner with businesses that want to increase their sales team performance and get their employees more involved or need custom programs that match what they’re trying to achieve. Our toolkit has everything from branded debit cards to employee recognition systems to sales incentive programs, and we adjust it based on what your business needs most. The focus always stays on programs that produce trackable results that you can see in your numbers. To see how we can help businesses maximize their ROI and sales performance, just reach out for a free demo, and we’ll show you what makes Level 6 different!
Claudine is the Chief Relationship Officer at Level 6. She holds a master’s degree in industrial/organizational psychology. Her experience includes working as a certified conflict mediator for the United States Postal Service, a human performance analyst for Accenture, an Academic Dean, and a College Director. She is currently an adjunct Professor of Psychology at Southern New Hampshire University. With over 20 years of experience, she joined Level 6 to guide clients seeking effective ways to change behavior and, ultimately, their bottom line.
