Carrying a balance? No rewards card for you!

Cashing In columnist Tony Mecia
Tony Mecia is a business journalist who writes for a number of trade and general-interest publications. He writes "Cashing In," a weekly column about credit card rewards programs, for

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Question Dear Cashing In,
Instead of auto-paying most bills from my bank account, as I do now, my brother-in-law says I should pay everything (mortgage, utilities, insurance premiums, car payment, dining out, pharmacy charges, groceries) with a single credit card that offers both cash back and points toward travel and other purchases. I am currently paying $500 per month on a couple cards until their balances reach zero. Can I use a rewards card to pay those down? Does this make sense, or is there a downside I am missing in setting up one card to pay for everything? -- Lisa

Answer Dear Lisa,
I was ready to stand with your brother-in-law. I was prepared to say, "Hey, great idea." That's because charging bills on your credit card can be an excellent way to reap rewards, whether it's cash back, travel or something else. Instead of paying bills from your bank account and receiving no rewards, why not charge the bills on your card, earn the rewards, then pay the credit cards off from your bank account, right?

For a lot of people, that is an excellent strategy.

For you, though, I can't recommend it, Lisa. From your question, it sounds as if you are carrying balances on at least a couple cards.

This might not get said enough, but if you do not pay off your balances every month, you should not be focused on earning rewards from credit cards. Instead, concentrate on paying off your balances. That's because rewards are not rewarding if you're incurring finance charges.

Let's go to some simple math. Say you have a card with an 18 percent interest rate that gives you 1.5 percent cash back on every purchase. If you charge $1,000, you will have earned $15 in rewards. Not bad. But if you fail to clear the balance that month, and you pay 18 percent annual interest on $1,000, you will pay $15 in finance charges for that month alone. That wipes out your rewards. Continue to pay interest in future months and those charges will outweigh your rewards.

Even if you had more lucrative rewards or a lower interest rate, you would still wipe away most of your rewards by paying interest. The better financial move is to pay off your credit card debt first -- perhaps by transferring the balance to a card with a 0 percent interest rate period. You do not earn reward points on balance transfers, and you'll likely pay a fee of between 3 percent and 5 percent to transfer the balance, but depending on how much you owe and your current APRs, you may still save money by going this route.

Once you have paid off all of your existing balances, you can focus on rewards (assuming you can avoid carrying balances in the future). Only then does a strategy of shifting as much spending as possible onto a solid rewards card makes sense. Keep in mind that any late payment fees or interest charges will wipe away the value of your rewards.

On paying bills, note that you will be able to move many -- but not all -- spending onto a rewards card. Credit cards do not have an online "bill pay" feature like your bank probably does. Instead, you have to work through the companies you want to pay. Usually, you can charge utility bills and other household bills (which sometimes come with an extra fee for paying with credit). But you cannot charge mortgage payments or car payments.

You also cannot pay credit card bills with another credit card unless you take out a costly cash advance -- a money-losing proposition.

In the future, by paying a lot of your bills with a credit card instead of a bank account, you can earn substantially more rewards. But pay off those balances first!

See related: 6 bad reasons to open a new card, How to defeat debt and still have fun

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Updated: 02-17-2019