Money Management Tips
Money at 30: 10 Essential Credit Card Rewards Dos and Don’ts
Depending on who you ask, credit cards are either the enemy of good personal finance or an exceptional tool that can help your money go further. Personally, I find myself somewhere in the middle, although I’ve definitely come to appreciate the good aspects of credit cards in recent years. As a result the number of cards in my wallet has steadily grown as I’ve learned more about how to maximize rewards and use benefits to my advantage.
10 Essential Tips for Earning and Using Credit Card Rewards
So how can you make the most of your credit cards? Let’s look at 10 essential things beginners should and shouldn’t do when it comes to earning and utilizing credit card rewards:
DON’T: Carry a balance
This is pretty much the cardinal rule for credit card rewards. By failing to pay off your full balance on time each month, you’ll likely be spending far more in interest than you’ll gain in rewards. For example, while earning 5% cash back on a given category is great, you may end up paying upwards of a 20% APR on all of your purchases if you carry your balance to the next month. Therefore, if you don’t trust yourself to pay off your card each month, it’s better to stay away than try to play the game.
DO: Research new potential cards
When you’re ready for new credit card, it’s always a good idea to do your research. Luckily these days there are several resources that can help point you in the right direction. Among them are sites like Credit Karma, NerdWallet, The Points Guy, and more. In each case you’ll be able to browse different cards, compare them to similar products, and hopefully find one that makes sense for your needs.
DON’T: Get a store credit card (probably)
Going hand in the hand with the idea of properly researching new cards before applying, it’s usually not a great idea to make your credit card decision at the checkout counter. While saving 10-20% on your purchases might sound nice at the moment, there are several reasons why store credit cards are typically not worth your time. For one, they may only be good at a single store (although some do partner with American Express, Visa, or others). Moreover some store cards offer comparatively low credit limits. This could then inflate your utilization and hurt your credit score. Thus the moral of the story is to not be impulsive and carefully consider store credit cards as you would any other.
DO: Look for possible bonuses
As you’re doing your due diligence on new card opportunities (right?) you may come across special sign-up bonuses, welcome offers, initial spending bonuses, or other names for what are essentially the same thing. In order to entice you into applying for a new card, many issuers will pay out a cash or point bonus once you reach a certain amount of spending in your first days as a cardholder. It seems a typical length of time for this spending window is 90 days but it can vary. As for the amount you’ll need to spend or what you’ll get for it, that will depend on a number of factors. Moreover, there are times when these offers can increase, whether as part of a large promotion or due to what are known as “targetted offers.” Just as this name implies, these deals aren’t open to the general public but are instead only available for some, such as those who have previously shown interest in the brand, those being referred by others, or really any other reason. P.S. – one place where you might encounter these targetted offers is Card Match.
While most bonuses utilize the initial spending structure, there are some exceptions. The Discover It card is one such example as, instead of offering a set bonus up front, it instead matches the cash back users earn during their entire first year. Thus it’s always smart to keep an eye out for potentially lucrative offers but ensure that you fully understand them before applying.
DON’T: Overextend yourself for a sign-up bonus
When applying for a new card, there’s a good chance that the sign-up bonus is a major motivating factor. That’s also why you’ll find blog entries and services all about helping credit card customers meet their minimum spend in order to earn their initial spending rewards. However there’s a difference between getting creative about your spending in order to reach your goal and overspending. If you need to make extra, expensive purchases in order to earn your bonus, it may not be worth it — especially if it causes you to carry a balance or borrow from elsewhere.
Once again, this is where doing your advance research and calculating can really come in handy. Before signing up for a card, come up with a realistic plan for meeting your minimum spend.
DO: Apply for multiple cards (if they make sense)
If you find a credit card you like and you’re still able to keep your utilization low while using it, why bother getting another? The answer is that there’s no perfect credit card that tops the rest in every category. Instead the optimal strategy is to find a variety of cards that complement each other. For example, my Discover It card is great for its rotating 5% quarterly categories while the 4% back on dining and 2% back on online purchases that my Uber Visa earns make these two cards work well in tandem. Furthermore the recent addition of the Apple Card to my (digital) wallet came about after I realized that I could make use of its 2% and 3% categories.
Understandably you may feel like having too many credit cards — including juggling due dates and carrying around all of that plastic — may be more trouble than it’s worth. To that point, you should always stick to what you’re comfortable with. That said, adding just a few key cards to your wallet could actually benefit you overall.
DON’T: Get several cards with identical benefits
With the previous explanation out of the way, you can probably see why it doesn’t make much sense to get two cards that offer pretty much the same things. Remember: the goal isn’t to have several credit cards just to say you have them. Instead you’ll want to be strategic with your plastic in order to maximize rewards.
DO: Explore your best redemption options
Another wrinkle that complicates some credit card options involves redemption. This is especially true of cards that offer points instead of cash, although there are some cash back cards that also present some choices to make.
With many cards, you’ll have to decide how you’d like to cash in your rewards. Some typical options include cash transfers to a bank, a statement credit, direct redemption at select retailers such as Amazon, gift card purchases, point transfers to travel partners, and more. What makes things difficult is that not all of these options are created equal. One example is that the Discover It card allows you to score bonuses of $5 or more when trading in your cash back for gift cards from participating retailers. Meanwhile, if you look at American Express’s calculator for Membership Reward points, you’ll notice that the value per point varies by what you’re redeeming for. In this case a statement credit earns you just 0.6¢ per point while transferring your points to a partner airline might allow you to see 2¢ per point or more in value.
While this all may sound a bit overwhelming at first, it will make a lot more sense when you’re actually looking to cash out your points. In the meantime, it’s just something to be aware of.
DON’T: Make purchases just to earn rewards
Bringing things nearly full circle, just as it’s a bad idea to carry a balance on your card because you wanted to earn rewards, making unnecessary purchases in the pursuit of points is also rarely a smart idea. It’s really the same fallacy that occurs when you see an expensive item on sale for far less — sure it’s half price but that doesn’t mean it’s worth buying. Keep this in mind when shopping and don’t let this false idea creep its way into your brain.
DO: Calculate value expectancy from annual fee cards
Finally, if you’re considering a card with an annual fee, calculating the value expectancy can be extremely helpful. To do this, you’ll want to consider any credits or entitlements, return from anticipated spending, and other benefits to determine if you’ll come out ahead. What’s more, you’ll likely need to conduct this practice each year as your renewal approaches.
When making your calculations, you’ll also want to be honest with yourself when valuing certain perks. For example the American Express Platinum offers $200 in Uber credits per year but, if you don’t use the service much or these credits cause you to spend more just to use them, then you shouldn’t include the full value in your equation. By the way, a great resource for helping you figure out if an annual fee card makes sense for you is AskSebby.com where you’ll find several card calculators to help walk you through the process and ensure you don’t miss anything.
In my view, when used properly, credit cards can be a beneficial personal finance tool. Of course the emphasis there is on “properly.” While those prone to overspending are probably better off sticking with cash and debit cards, those willing and able to use their cards responsibly can reap rewards. It may take some research, time, forethought, and perhaps some clever tricks, but you too can ensure that your credit cards are rewarding.
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