There are a lot of people in personal finance industry that will tell you things like, “Credit Cards are the Devil!”. They have a fervent hatred of all credit cards and scream from the top of the roof how you should pay yours off and cut it up! I agree with part of that – you should pay your credit card off every single month. However, if you can use it responsibly, a rewards card can lead to big rewards over the course of a year and help your path to FIRE. For our recommendations on some great rewards cards check out our Credit Card guide.
The first rule of credit cards
If you take away nothing else from this article there is one rule that you need to remember and try to abide by at all times:
Pay off your credit card balance, in full, on time, every single month
If you don’t do this you will pay high interest rates and penalties. If you can’t follow this rule then you should not have a credit card except for emergency situations. However, if you can responsibly use your credit card and follow this one rule, then continue reading.
Decide on the type of rewards
Although there are many types of rewards cards out there, the two categories that I will consider are cash back rewards cards and travel/air miles rewards cards, with a strong preference to the former.
Cash back cards often have an initial reward that is dependent on you spending between a few hundred and a few thousand dollars in the first three months. This is a teaser to draw you in, but it can certainly provide a nice kicker. Thereafter the cards will typically pay 1-2% on all purchases you make, and as much as 5% in some product categories.
Let’s take the Capital One Savor Cash Rewards Card for example. They pay a $500 bonus if you spend $3,000 in the first 6 months, 4% cash back on all dining and entertainment, 2% at grocery stores, and 1% on everything else. So, if you spend $400/month on dining and entertainment, $400/month on groceries, and $500/month on other bills on this card you could get $29/month in rewards ($16+$8+$5) meaning you could take home nearly $900 in cash back in your first year and about $350/year thereafter.
Personal Note: I once went to buy a car and was going to pay cash. However, I saw an offer for a card like this, and used it to buy the car and I then paid off the card the next day. I got a $250 reward + 3% cash back on a $20,000 purchase meaning I saved $850 in a single day!
For travel I prefer airline miles cards because I typically make 20+ flights per year, and nearly all of these flights are in the same airline network. However, if you don’t fly very often you could consider using a hotel rewards card instead; however, in this case using a cash back card would probably still make more sense. With travel cards it is about either getting a large number of miles when you first use your card (typically enough for a free domestic round trip flight), to help accumulate miles when you are getting close to a travel reward, and/or to let you check bags for free.
I go with the Chase United Explorer Card which allows me to get a free checked bag when I book a flight with that card and one mile/dollar spent. When making 20+ flights per year, normally with a lot of luggage since I travel with the kids, this saves me nearly $100/flight in baggage fees.
Don’t get status cards
Some companies offer what I call “Status Cards”, which are essentially plain credit cards that are a special color or material and are denoted to show wealth. These are a waste of money and I would say that are anti-reward cards that are simply designed to prey on people’s vanity. Avoid these and avoid the extravagant annual fees they typically involve.
Watch out for the fees
Many rewards cards come with annual fees that can be as high as $100/year. Obviously, you need to gain more than $100 in rewards to break even, which is why I normally advise people to only have one rewards card at any time, except in special circumstances like if you fly A LOT.
Rewards cards can earn you serious cash back and can be a way to save close to $1000/year if you work the system. However, if you can’t/don’t pay your card off at the end of every month then you really shouldn’t be using a credit card at all.
Also, if you have a spending problem rewards cards can actually add to the problem – many people find that they spend more overall when they have a rewards card and are getting cash back. Although readers of this site should know how to stick to their spending plans, for those who have trouble, consider only having a plain vanilla no-fees credit card for emergency use only.
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