Using Rewards Credit Cards

April 22nd, 2008 · No Comments

I’m going to post an article here I originally wrote for Helium.Com. I’ve reworked the article a bit and cleaned it up some. It is a helpful article I wrote about getting the most benefit from a rewards-style credit card. Hopefully you’ll find the advice and information helpful!

In the 21st Century Credit marketplace it is often difficult to sort through the thousands of different offers of credit cards. Some credit cards promise triple points for the first 6-months, others promise a 5% rebate on gas and yet others proclaim “freedom” and let you switch between points or airline miles or cash back rewards.

Before you stress yourself out too much worrying about which credit card to pick and whether you should even be using it, there a few simple questions you can follow as a guideline to maximize your benefits while minimizing your costs.

Does the credit card require an annual fee?

This is a key thing to check and can usually be found on the back of the letter promising that you are pre-approved. On the back of every credit offer there is an Annual Percentage Rate listed as well as any annual fees and what penalties occur for late payments. If the card is offering 1% cash back reward, but is charging a $59 annual fee this is not going to be a good deal unless you spend a great deal of money on your credit card. You have to spend $5900 on that credit card before you even break-even!

What is the APR (annual percentage rate) on the card?

Many rewards cards offer rewards at the expense of a reasonable APR. If you have good credit, you should be able to get credit cards that have 9.9%-10.9% fixed APR. If the rewards card promises a 2% cash back reward but has an APR of 18.9%, you aren’t gaining anything.

Are you able to setup most of your bills to be paid via credit card?

This question’s answer is crucial to maximizing the benefits of having a credit card that pays out rewards. If you can move your power bill, your phone bill, your cell phone bill, your water bill and all of your regular purchases to your credit card, you will be able to maximize your rewards. Any bill that you normally pay with a check you should try to move to the credit card and then you can pay the credit card via an electronic funds transfer from the same bank account you were writing checks against.

Is the card tailored to your purchasing habits?

There are literally thousands of different credit card offers, so instead of accepting the first one that lands in your mailbox, try doing some research on the web first to see if there isn’t a reward program that better matches your purchasing habits. For example, I like to purchase a lot of things from Amazon.Com, so I have an Amazon.Com Visa card that gives me triple rewards points on anything I purchase from Amazon, and the rewards come in the form of Gift Certificates for Amazon! If you purchase a lot of gas (you commute a long ways to work, your job requires you to travel but you are reimbursed after the fact), you should look into getting a credit card branded by a gas station so that you can get a larger percentage back on all gas purchases. If you travel a lot, you should probably get a card that gives you airline miles, and possibly higher rewards on air travel related purchases.

Is it wise to charge things instead of paying for them right away with your debit card or check?

This is the largest misconception that exists in the world of credit cards. If the card has no annual fee and has a “grace period” (most cards have a 30-day grace period before a purchase has interest applied to it), then there is no cost to you for using a credit card as long as you pay it off each month! You can almost think of it as a free 30-day loan. In fact, if your money earns interest in your savings account, why not earn interest on it each month and then pay off the credit card at the end of the month?

Question number five has one of the most important answers in this whole article. The key to successfully paying off the card every month is to pretend you have spent the money already. If you are incapable of keeping track of what you are putting on the card every day, you should probably not be using credit to pay your bills. Until you exceed your limit or miss a payment, it may seem like using credit cards are “free money” but you have to always remember banks do not sponsor credit cards because they like helping people. Banks like to make money and they do that by allowing you to over extend yourself and not pay the card off one month - resulting in interest!