Credit cards are often described in negative terms. And it’s true that credit cards usually come with high interest rates and can lead some people into debt. However, if you use credit cards responsibly, they can offer numerous benefits.
Financially savvy individuals know how to use their credit cards in a way that allows them to avoid paying any additional money (in interest or penalties) and benefit from rewards, cashback, or points. You can be one of those people, too. Continue reading to discover the most effective strategies for maximizing the benefits of your credit cards.
5 Strategies for Using Credit Cards for Rewards
Here are five essential strategies you’ll need to implement to ensure you get the most from your credit card:
1. Consider Your Incentive
Your credit card should do something for you. Typically, most people sign up for a card that offers cash back, rewards, or points, so their everyday purchases come with a perk. Make sure your rewards match what matters most to you. If you spend a significant amount on travel each year, a card that earns free hotels or flights might be the best option. Conversely, some prefer cashback cards so they’re not limited in the way they spend their rewards.
To maximize rewards and benefits as quickly as possible, aim to have only one or two credit cards at a time.
2. Choose the Right Card for Your Everyday Spending
Most reward cards have tiers depending on the transaction type.
For example, a cashback card might be structured as follows:
- 2% on restaurants and gas
- 1% on grocery shopping
- 0.5% on everything else
And a travel rewards card might have the following points structure:
- 10 points per $1 on flights and hotels
- 5 points per $1 on restaurants and gas
- 1 point per $1 on everything else
Before selecting a card, identify the areas where you spend the most with your credit card. If your biggest monthly credit card expense is groceries, you want a card that rewards that at the highest level.
3. Claim Bonus Offers
Almost every rewards credit card comes with a sign-up bonus. If you’re going to sign up for a new credit card, make sure there’s a sign-up bonus attached. Read the terms and conditions of the bonus to ensure you can meet the requirements. For example, a cashback card might offer an extra 2% back on all purchases for the first three months, but you must spend at least $1,000 to receive the bonus.
4. Redeem During Bonus Redemption Promotions
Once you have your credit card, make sure you sign up for marketing email alerts from your lender. Some credit card companies have bonus redemption promotions a few times a year. During this time, your points may be worth more. For example, a travel card may double the value of your points if you redeem during the promotion.
These promotions often repeat annually, allowing you to anticipate when they occur so you can save your points for the next promotion.
5. Plan Big Purchases Wisely
It seems you can’t get through life without having large bills pop up. It could be you need new tires for your car, a new water heater, or an expensive dental appointment. Whatever it is, large bills can be a big boost for your credit card rewards.
When you know you have an upcoming big purchase, consider which credit card will give you the most rewards. You could also try signing up for a new card and using your big purchase to take advantage of a sign-up bonus.
However, it’s essential to note that you should only charge large expenses on a credit card if you can pay them off immediately. The average credit card interest rate is 28.67%, which means carrying a balance can be extremely costly.
Some Important Reminders About Credit Cards
Of course, credit cards do come with some risks. There are some “traps” to watch out for when regularly spending on your credit cards.
Here are some critical reminders that you can never forget before going to swipe your card:
- Do a cost-benefit analysis for any annual fees. Many of the better rewards cards come with a yearly fee. These fees can range from $50 to $800. You should consider this fee when reviewing the benefits you receive from your credit card. Having a luxury card with a $500 annual fee just so you can get airport lounge access for your one vacation a year probably isn’t the smartest choice.
- Never pay interest or late penalties. As highlighted above, credit cards often come with high interest rates and substantial penalties for missed or late payments. Always pay your statement in full to avoid giving your credit card lender extra money.
- Credit card churning comes with risks. Some people attempt to earn as many rewards as possible by continuously signing up for new credit cards, taking advantage of bonus rewards promotions, redeeming points, and then shutting down the card immediately afterward. This is known as credit card churning. However, credit card churning comes with several risks, including a negative impact on your credit, an increased risk of credit denials, and heightened exposure to identity fraud. It’s better to find a card or two that you like and stick to it.
- Be aware of credit card processing fees. It can be tempting to want to put every large bill you have on a credit card. However, some businesses that often have large invoices charge an additional processing fee if you choose to pay by credit card. This fee is almost always more than your rewards are worth, so it’s not worthwhile to use your credit card.
- Don’t overspend for rewards. Don’t let your excitement about collecting points or rewards lead you to overspend. It’s not worth getting into debt just to get some extra travel points or gift cards.
- Maintain a credit utilization ratio of 30%. Your credit score will be negatively impacted if you spend too much on your cards every month, even if you pay it off in full. Aim to keep your credit utilization below 30% of your total available credit. So if you have three cards with $500 limits each ($1,500 total), you shouldn’t spend more than $450 across all three cards.
Is It Okay to Use Credit Cards?
Personal finance guru Dave Ramsey strongly advises against using credit cards, recommending that individuals avoid them altogether. But that’s a little too black and white.
People who can’t control their spending are indeed better off without a credit card. But if you’re financially responsible, credit cards can be very advantageous.
Just remember to keep your spending in line, always pay your bills on time, and follow a strategy to maximize your rewards.
You might also be interested in: Credit Cards: Pros and Cons – A Balanced View
