'It's easy to get upside down' on your credit card with inflation, says analyst. Here's how to use rewards to your advantage

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Key Points
  • Historically high inflation is costing American households an extra $460 per month, say economists at Moody's Analytics.
  • The average interest rate on credit cards is up to 16.8%, per Bankrate.
  • "You don't want to be chasing 5% cash back if you're paying 17%, 20%, even 25%," says Bankrate senior industry analyst Ted Rossman.

If you're feeling like your credit card is slowly melting your wallet lately, you're not alone. Historically high inflation is costing American households an extra $460 per month, according to economists at Moody's Analytics. And lot of those extra expenses are going on plastic. After hitting $841 billion in the first three months of 2022, U.S. consumer credit card debt is expected to hit all-time highs this year, industry analysts say.

With interest rates set to continue to rise as well, credit cards can be viewed as a sort of double-edged sword for consumers looking to keep up with higher prices.

If you dutifully pay your balance off every month, your cards' cash-back deals and rewards points can help alleviate higher costs. But if you run a balance, you'll owe interest payments than can compound the longer you go without catching up. Interest rates on credit cards are currently 16.8% on average, according to Bankrate.

The key is not going for the former and ending up with the latter, says Ted Rossman, a senior industry analyst with Bankrate. "You don't want to be chasing 5% cash back if you're paying 17%, 20%, even 25%" in interest, he says. "It's easy to get upside down on that."

To avoid that scenario, be sure to opt for a card that is consistent with your life stage and spending habits. Here's how Rossman says you can do it.

Beginners: 'Prioritize low fees'

Hurdles have gotten higher of late for those looking to open their first credit card, notes Rossman. "You talk to Gen Xers, and they'll tell you they were basically handing them out on the quad in college," he says. "Now 21 is more or less the barrier unless you can prove sufficient income. And beyond that they want you to have credit and experience, but how do you get it?"

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One way to build credit, he offers, is by starting out with a secured credit card. The cards require a deposit equal to your credit line — a virtual guarantee to the bank that you'll have sufficient funds to pay off your debts. These aren't prepaid cards; you'll still have to pay your balance every month. Doing so will help you build a credit history if you don't have one. "They're a bit limiting, but it's really hard to get in trouble there," says Rossman.

As a young person, you're generally only going to qualify for cards with lower limits and higher interest rates. That's why, if you're building credit and go with an unsecured card, you'd be wise to keep things on the conservative side until you know you've established responsible spending habits. "Start out with a safe product. I'd prioritize low fees over rewards," Rossman says. "Don't get suckered in by 3% rewards if you're going to owe 20% in interest."

Intermediate: Cash-back cards offer 'universal appeal'

If you've established a track record of responsible spending and on-time payments, it may be time to level up to a card that offers more in the way of rewards for going about your everyday spending. For many people, adding a card that pays cash back on your purchases is a great step up, says Rossman.

"Travel cards get a lot of headlines, but they're also more complicated. Most people like the simplicity and universal appeal of cash back," he says. "Paying no annual fee and getting 2% cash back might not be the sexiest, but it's hard to beat for most people, unless you really want to play 'the game,'" of juggling multiple credit cards to maximize rewards.

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You'll want to keep monitoring your spending to make sure you're not overwhelmed, but if you're paying on time and in full, a flat cash-back reward can feel like a rebate on everything you buy, says Rossman. "You're buying stuff you would have bought anyway and you're getting a risk-free return across the board," he says. "If it's 2% across the board, that can really add up."

Advanced: 'Know thyself' before getting a high-fee rewards card

For those looking to juice their rewards beyond what a basic cash-back card may offer, you can head in one of two directions.

One is to amp up the cash back you're getting for purchases you're making already. "Maybe you stick with your cash-back card as a foundation, but then add another card that pays a premium on certain categories."

Depending on which cards you choose, you may be able to get up to 6% on groceries, for instance, or 3%, 4%, or 5% on other popular categories such as gasoline, entertainment, and dining out. If you find that's where you already do a lot of your spending, you can use one of these cards to up your cash rewards. And because those cards may offer a more meager 1% when you're not spending on the special categories, "you can use that 2% cash-back card as a baseline for other purchases," Rossman says.

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Another route: going for big rewards. Among the most popular cards for those looking to maximize rewards offer benefits for travelers. But before signing up for one, you'd be wise to reckon with how you'd use it.

"When it comes to travel cards, know thyself," says Rossman. "They're more lucrative on a per-mile basis but also more complicated. Do you have the flexibility to travel when the best deals are, or are you a once- or twice-a-year traveler?"

Many cash-back and travel cards geared toward more advanced users come with an annual fee, which means you'll have to decide whether the benefits you get from the card are enough to offset the costs.

"If you're paying the annual fee on that travel card, are you using the lounge? Are you getting the free checked bags? You need to think about that individual calculation," Rossman says. "If the card comes with benefits for things like food delivery and streaming services, maybe that offsets the fee for you. Just think how you'd personally use these cards."

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