How to Make Credit Card Rewards Work for You
October 17, 2017
By Louis DeFelice
Abacus
72% of Americans have a credit card, and chances are you’re among them. Like many of your fellow cardholders, you’ve probably found yourself frustrated by pesky fees, high interest rates, and points or miles that never seem to be enough to redeem for a trip or anything more than a free cup of coffee.
That being said, a little bit of patience, foresight, and knowledge can flip the equation: you can profit from the bank, not the other way around.
Rewards 101
The credit cards you’ll hear about most are rewards cards. There are three types of rewards: cash, points, and miles. Cash is the simplest: a card like the free Citi DoubleCash will give you 2% back on all of your purchases (once you’ve paid your bill). Redeeming is a simple as receiving a check or statement credit for what you’ve earned.
Points become a little more complicated. There are many variations, and most are proprietary. At their simplest, points can typically be redeemed for one cent per point. If you earn one point per dollar, you’ll have a dollar’s worth of points after $100 in spending. Other point currencies, such as Chase Ultimate Rewards, can be redeemed at the one-cent value for cash or gift cards, but also transferred, point-for-point, to airline and hotel loyalty programs. The value of those transfers can be hard to calculate, but can easily allow you to double the dollar value of your points.
Finally, miles are the proprietary currency of various airlines. These are usually earned with co-branded credit cards, such as Delta’s American Express card. These points are usually not transferrable, and are deposited right into your connected frequent flier account. This system is virtually identical to those of hotel cards, such as Marriott’s Chase card.
Set a Goal, Choose a Card
Dozens of valuable credit cards are out there, but far fewer will fit your specific goals. The best way to sort through the numerous banks (and even more numerous cards) is to consider what your goals are and what your spending patterns look like.
Would you like to travel to Europe? If so, an American Airlines card won’t be the best choice: their award flights to Europe carry roughly $700 in fuel surcharges. Do you want simplicity? The Capital One Venture series is simple and consistent, as is a straightforward cashback card.
If you dine out frequently, you may earn more with the Chase Sapphire series, which reward dining purchases with more points. Other cards focus on travel purchases, grocery shopping, and even rotating, quarterly categories. Understanding how you want to be rewarded will allow you to reach adventure and fulfillment much more quickly than choosing a card based on the latest celebrity endorsement.
Above and beyond earning points- or miles-per-dollar, many cards come with sign-up bonuses. Typically, a sign-up bonus will be valuable enough for a one-way, if not round trip transatlantic trip. You’ll usually have to spend between $1,000 and $4,000 in the first few months of card ownership to be rewarded with a windfall of up to 100,000 points or miles. These bonuses are often a valid reason for applying, but only if they are worth the spending and (sometimes) the annual fee.
Who’s Paying for All of This?
You can literally fly around the world for free simply by maximizing your use of points and miles. But water doesn’t flow uphill; someone out there is paying for your adventures. Credit card issuers profit in a number of ways, and those ways must always outweigh the costs of rewarding customers with points and miles.
Two opposite extremes exist in the credit card world. Some consumers open a dozen credit card accounts to carefully and cleverly manipulate rewards in order to travel for little or no money. (You can read about my adventures doing that here). Others have the same number of cards, but use them to fund a lifestyle that is far above of their means. The latter group pays enough in interest to fund the former and leave the bank with plenty of profit left over.
The unfortunate reality in the U.S. is that poor financial literacy leads to unhealthy borrowing behavior. This drives banks, airlines, and hotels to aggressively market rewards cards that seem to grow more valuable each year. By patiently and carefully considering what gets a spot in your wallet, you can enjoy the perks of using a credit card while taking advantage of a fairly predatory system.
Final Tips
• After choosing a card, but before applying, read blog articles, reviews, and the fine print to make sure that you will be able to fully take advantage of the rewards the card offers.
• Sign-up bonuses are the quickest way to stack up tens of thousands of points or miles. If one is offered, make sure to meet all requirements so you don’t lose out on the opportunity.
• Never carry a balance on a credit card: rare is the situation in which the interest payments will justify the reward. If the card is not free, make sure to assess whether the annual fee is worth the rewards.
• Finally, keep an eye on your credit score by using free websites such as Mint or Credit Karma, which will allow you to catch mistakes quickly. Credit scores affect your mortgage, your car loan, and even whether a landlord rents to you. The theme that emerges from all this advice is attention to detail. Maintaining your account is even more important than choosing a card.
Louis DeFelice is the creator of Wonder, Learn, Invest, and a junior at Yale University. Louis has interned with Abacus Planning Group for two summers.
Abacus is a financial advisory and investment counsel firm known for its passion in creating success for clients and family businesses through skillful listening and smart financial decision-making. Managing over $1 billion on behalf of its 210 clients, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.
