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Most credit card companies offer reward credit cards.
For your normal spending, you will get between 1-5 % back.
This may seem small.
However, it can add up to hundreds or even thousands a year depending on your spending.
This is for the spending you would do anyway.
The only thing you need for this to work is to pay your balance in full each month.
That is a lot of free money, so if you can pay your balance in full each month, this is a no-brainer.
This only works if you pay your balance in full each month though.
If you don’t, the interest you pay would cancel any rewards, and make credit card companies rich.
If you cannot pay your balance in full, please don’t use a rewards credit card.
If you are reading Adding Pennies, I think this is easy to do though.
You also need to have a high credit score to qualify for these cards.
What are rewards credit cards?
Rewards credit cards give you a percentage back on your normal spend, usually between 1-5% again.
They reward you for using your credit card more.
Reward cards usually fall in two categories:
- cash back
- travel rewards
Some cards give higher rewards for certain categories like groceries, gas, or travel.
Rewards cards usually have a high interest rate, so again they are only worthwhile if you pay them off in full each month.
Why do credit card companies give you free money?
Credit card companies profit the more you use your credit card.
There are two ways they profit.
1. Transaction fees
Transactions fees are a charge to a business just for using a credit card, usually around 3%.
I have another business where I accept credit cards.
Each time someone wants to use a credit card, I have to pay this fee.
These are fees charged to businesses and not consumers.
2. Interest
Interest is how much credit cards charge you to carry a balance.
Credit card companies make a lot of money off interest.
Honestly, credit cards have such a bad reputation that many people would probably use a debit card if there were no rewards.
Why You Should Put All Your Money on A Rewards Card
Like cashback sites, this is simply too much money to be left on the table.
If your normal spending is $2000 a month, you would get $20-$100 per month as cards range from 1-5%.
That is $240-$1200 a year.
Think $2000 per month is a lot to spend?
You are just putting your normal monthly expenses on the card.
Here are some of the average person’s expenses per month excluding rent/mortgage that you can put on a credit card:
- Gas $200
- Groceries $500
- Car Insurance $100
- Dining out $300
- Clothing $100
There is a way that you can put your mortgage or rent on a credit card too.
These services usually have a fee, but sometimes the fee can be waived.
This list does not include all of the average person’s monthly expenses either, so you can see how most people can put $2000 on a card using their normal monthly expenses.
The Only Negative
As you can see, this is simply a lot of free money to be made.
The thing is that credit cards can get people in debt and be tricky.
Some people are tempted to spend beyond their means.
I emphasis again that if you cannot pay your balance in full each month, then this is not for you.
Again, I think if you are reading Adding Pennies this should be easy to do.
You read Adding Pennies because you want to put money back in your pocket and not have credit card companies take your money in the form of interest.
How to use a rewards card and pay the balance off each month
How do you make reward cards a money maker for you?
Here are some easy steps.
1. Put your normal expenses on the rewards credit card(s)
For example, the normal expenses you usually pay cash for already could include:
- Mortgage/Rent
- Groceries
- Gas
- Utilities
2. As soon as the charge hits the statement, pay it off
When you see the charge on your card, pay it off.
You want to be aware of closing dates and utilization on card too.
You want to protect your credit score.
You cannot get most rewards cards without a high credit score.
Most people who use reward cards effectively and pay their balance in full each month see their credit score increase.
3. Stay organized
Again, you need to be aware of closing dates, utilization on each card, and any annual fees.
This takes organization.
Keep a spreadsheet.
4. Only buy things you can pay cash for
If you cannot pay cash for an item, don’t put it on a rewards credit card.
The interest would defeat any cash or points.
If you have a big ticket item you want to finance with a credit card, look for a 0% credit card, but don’t use a rewards card.
How to find the best rewards cards
1. Look at your spending
If you spend a lot of your money on gas and groceries, then you need to get a rewards cards that gives the highest rate back for groceries or gas.
For example, the American Express Blue Cash Preferred card gives 6% back on groceries for a $95 fee.
You can google the top cards for groceries or whatever category.
2. Decide if you want cash back or travel rewards
It would seem that cash should be king.
However, if you travel a lot, a travel rewards card will usually give you more for your money.
Cash back cards usually transfer at a 1:1 ratio.
Travel portals like Chase Ultimate rewards can give you a better ratio.
A $600 cash back card could be worth $750 in free travel when using a travel card.
You can check out our sister site Travel Points 101.
Again, travel cards can actually get you more for your money as well as your next free trip.
In the earlier example of someone who spent on groceries and gas, if they valued travel points, they could get the American Express Everyday card and earn valuable points toward travel.
This would be a better choice if you valued travel because you would get American Express Membership points instead of cash.
3. Decide if you want to pay a fee
In the earlier example, the Blue Cash card has both a $95 version and a no fee version.
If you like travel points, you could choose the Everyday Preferred card.
You could also choose the American Express $250 Gold card.
It may look easier to choose a no-fee card, but cards with an annual fee can cover the fee and then some.
For example, the $250 Gold card may seem like a lot, but if you value American Membership points and dine out frequently, it actually is the best value.
Why would the more expensive $250 card be the best value?
It comes with $100 travel credit and $120 dining out credit.
If you could use both of these credits, the card would be a $30 card beating the $95 Everyday Preferred card and maybe even the no fee Everyday card depending on how much you use it.
A scenario of how this works
Scenario One: Cash back
This person does not care about travel and just wants cash.
They spend heavily on groceries.
They use the American Express Blue Preferred card to get 6% back on $1000 of groceries each month.
They get $60 per month back (6% x $1000) in this category.
Scenario 2: Travel Rewards
This person also spends on groceries.
They value travel though.
They get the American Express Gold card.
They earn 4% back on $1000 of groceries at $40.
American Express Membership points are worth more than cash back cards so this is actually $80 worth of free travel.
They earned more in value because it was a travel credit card.
Takeaway from Two Scenarios
First, you see that the person who valued travel, earned more for their spending even though the card they used earned 4% instead of the 6% cash back card.
So if you value travel, travel cards are great.
Your $50 cash back will usually be turned into $100 in travel.
The next takeaway is this was just groceries we choose.
As we stated earlier, the average person could probably spend $2000.
So you could maximize spending in other categories like cell phone, internet, travel, dining out, etc.
A Note About Travel Cards
As I said earlier, travel cards can be worth more than cash back cards.
The travel cards that earn a higher rate transfer directly to airlines.
There are only 4 credit card programs that do that:
- Chase
- American Express
- Citi
- Capital One
Otherwise, your travel cards are just earning a 1:1 ratio like the cash back cards.
So make sure you are choosing travel cards from those 4 banks.
Tips To Earn Even More
- Use a cashback portal with a rewards card when shopping online
- Use discounted gift cards at places like restaurants where you can save around 20%
- Sign up for store loyalty programs like Target, Kohl’s, and Kroger
- When using reward cards for groceries combine with apps like Ibotta
- Use for holiday, gift shopping or big purchases as long as you will pay the balance in full
Summary
Rewards cards are a no brainer if you pay your balance in full each month.
For the items you would buy anyway, like groceries and gas, you get cash or points toward free travel.
As the earlier example shows, maximizing $2000 in regular spending would get you $100 in cash back each month or even $200 in free travel a month (travel points are usually doubled in value).
If you can use credit card strategically and pay your balance in full each month, who wouldn’t like an extra $100 or $200 toward a free trip?
Rewards credit cards are one of the best ways to put money back in your pocket.