Millions of Americans are benefiting from credit card rewards.
Credit cards offer a variety of rewards including cash back on purchases, airline miles that can be redeemed for flights, and points that can be redeemed for things like travel and gift cards. This isn’t an exhaustive list, though, as some cards offer extra perks like free checked bags and priority boarding on flights.
Despite millions of people benefiting from their credit cards, there are still many who are in the dark. They may have a credit card but don’t really receive much in terms of benefits. Or they may just not know how to find a card with the best rewards.
Credit card rewards have helped my wife and I take a number of free flights, as well as provided us with travel credits and reimbursement that made hotel stays more affordable. My goal in this post is to give you an intro to credit card rewards so you can start taking advantage of them.
First, let me be clear: none of this matters if you aren’t paying your credit card balance in full each month.
According to the Federal Reserve, credit card debt has surpassed a trillion dollars in the United States. A lot of people have credit card debt, and banks make money off of keeping people in credit card debt due to the double-digit interest rates they charge consumers who carry a balance.
If you have credit card debt it’s best to ignore the rewards you can get from them. Eliminating your debt should be a priority, as the amount you end up paying in interest will outweigh any benefits you receive.
It’s also important for me to point out that using credit cards and taking advantage of rewards doesn’t make sense if you end up purchasing things you otherwise wouldn’t. For example, if you wouldn’t have bought a new couch with your debit card or cash but you end up purchasing it with a credit card, the rewards you receive simply do not matter because you are spending money you otherwise wouldn’t have. You know yourself better than anyone else. If you struggle with credit cards it’s best to not use them.
If you don’t have credit card debt and you are confident that you don’t or won’t spend more that you would if you were paying in cash, then credit card rewards can be a great benefit. Let’s start with the first step: having good credit.
Establish a Solid Credit History
Many of the best credit card offers require good or even excellent credit. You may be wondering “what is a “good” credit score?” Your credit score is a number that ranges from 300 to 850. As a general guideline, here’s what each range means:
Less than 500: Very Bad
500-549: Bad
550-599: Poor
600-649: Fair
650-699: Good
700-749: Very Good
750 and up: Excellent
If you don’t have good credit, let’s go through two potential reasons why that may be the case – and what to do in each situation.
If you’ve never head a credit card
One reason you may not have a good credit score is a lack of credit history. If you’ve never had a credit card there is a good chance you have little, if any, credit history to go off of. If this describes you I encourage you to not get fancy with credit card rewards. Instead, look for a great “everyday spend” credit card that will give you a set cash back percentage (i.e. 1%) on each purchase you make. Here’s the card I recommend for a first credit card, as well as my picks for the top cash back credit cards.
Improving your credit history
Regardless of whether you’ve had a credit card or not, the approach you take to building a strong credit history is similar. To illustrate this let’s look at the five things that impact a credit score:
35% Payment History
30% Amount Owed
15% Length of Credit History
10% New Credit Applications
10% Types of Credit
As you can see, the two things that have the biggest impact on your score is payment history and amount owed, or credit utilization. Credit utilization means how much of your available credit you use. For example, if you have $1,000 of available credit and have a balance of $300, your credit utilization is 30%. Aim to keep your credit utilization below 30% at all times, and of course pay off your balance each month.
The two things to focus on are making your payments on time and keeping your credit utilization below 30%. There are other things that affect your credit score, but these are the most important.
Ready to take advantage of Credit Card Rewards? Let’s break down the different types of rewards you can get.
Cash Back Rewards Credit Cards
Cash back credit cards work exactly how they sound: with each purchase, you get a certain percent in cash back. Cash back can range from approximately 1% to 2% on every purchase, with some cards offering specific categories, such as gas stations, at a higher percentage (i.e. 3%, 4%, or 5%). There are also some cards that offer revolving categories. For example, there may be a new spend category each quarter for a specific card where you get 5% cash back instead of a standard 1%.
Finally there are also some cash back cards where you get a sign-up bonus or incentive, such as the Chase Freedom Unlimited where you can earn a $150 bonus when you spend $500 within the first three months of account opening.
Airline Rewards Credit Cards
Airline credit cards are one of my favorite types of credit cards. Most airlines today have credit cards. These credit cards typically come with a sign-up bonus where if you spend a certain amount within a certain time frame you get a bonus (i.e. if you spend $2,000 on your card within three months of opening, you get 30,000 miles). These miles or points can be used to book travel through the airline’s frequent flier program.
Even better, though, are some of the extra perks. For example, the United Explorer Card offers a bonus of 40,000 bonus miles after you spend $2,000 on purchases in the first 3 months your account is open. They also waive the $95 annual fee the first year. Additionally you get priority boarding, a free checked bag for you and your travelling companions, and two complementary United lounge passes each year.
Travel and “Points” Rewards Credit Cards
Airline credit cards aren’t the only travel rewards credit cards out there. You also have hotel rewards credit cards that operate in a similar fashion, where you gain points that can be used to book hotel stays.
Some of the best travel rewards credit cards, though, are cards where you accumulate points. For example, with the Chase Sapphire Preferred you get 60,000 bonus points after you spend $4,000 on purchases within the first 3 months of account opening. When you redeem through Chase Ultimate Rewards® you get the equivalent of $750 towards travel, or you can transfer the points 1:1 to any of their airline partners (including United Airlines, which is what I did). My wife and I have used our United miles, some of which were acquired through transferring Chase points, to book flights to Aruba and St. Martin (both islands I would highly recommend, by the way).
Finally there are cards where you get reimbursed for travel. For example with Capital One® Venture® Rewards Credit Card you earn 50,000 bonus miles once you spend $3,000 on purchases within the first 3 months from account opening. These 50,000 miles essentially equate to $500 in credits for any travel-related expense such as flights, hotels, and more.
If you opened one credit card four years ago and haven’t paid much attention to rewards, the sheer number of available options can be overwhelming.
I typically point people to the Chase Sapphire Preferred as one of the best cards to start with. With this card you get 60,000 bonus points after you spend $4,000 on purchases within the first 3 months of account opening. When you redeem through Chase Ultimate Rewards® you get the equivalent of $750 towards travel, or you can transfer to any of their airline partners (including United Airlines, which is what I did).
If you’re already using a credit card to make purchases, it makes sense to maximize your credit card rewards. The fact there is so many options out there means there are definitely some rewards programs that are better than others, so take the time to browse all the options and look for a quality rewards credit card today.
My wife and I have used rewards credit cards for free flights, cash back, and to make hotel stays more affordable. Please do not hesitate to contact me with any questions!
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