Credit card rewards programs are wonderful, offering cash back, travel points, saving money, booking flights or even paying for everyday expenses. The benefits can quite easily evaporate when one thinks he or she is overspending just to collect more points. So, let’s take a walk through how credit card rewards work, how to maximize those rewards, and how to stay in budget. Knowing how to use credit card rewards helps you make money from them without having to worry about being saddled with debt or paying more than you need to.
How Do Credit Card Rewards Programs Work?
Most credit card issuers provide reward schemes to entice and retain customers. They are offered in the form of award points, miles, or cash back per dollar put into the card. For example, you can earn 1.5 points per dollar on common purchases but 3 points on a dollar from dining and travel.
Types of Credit Card Rewards
- Cashback: It reflects the percentage of spending that is returned to you in terms of cash.
- Points: Redeemable for travel, merchandise, or gift cards.
- Miles: Travel-rewards commonly associated with the airline and redeemable for flights or seating upgrades.
As of 2022, CreditCards.com found that cashback rewards are favored by 42% of credit card users and travel rewards by 34%. Though knowing which best fits your lifestyle will help you make the most of rewards, be certain to keep spending in check and avoid overpaying for nonspecific purchases.
Keeping Rewards in Check and Not Overspending
Credit card reward utilization means collecting the highest dollar value of rewards without letting your desire to earn those rewards lure you into overspending. In this section, here are some tips on how to get the most out of your rewards program and strictly enforce a budget.
- Choose a Card That Fits Your Spending Profile: You can analyze your spending before applying for a rewards credit card. For instance, you will look for a card that offers higher points or cashback if you spend a lot on groceries and gas. Many of the cards have bonus rewards on specific categories of purchases. For example, the Chase Freedom Flex card provides a 5% cashback on a rotating category. That can be groceries, gas, or online purchases. Attempt to track these categories, as they'll increase your cashback significantly.
- Monthly Fixed Spending: This is the way you can prevent developing bad debt by seeking out rewards: set a cap each month based on your common expenditures. You would then restrain yourself to necessary spending and end up earning rewards without creating bad debt. As a rule of thumb, try to keep your spending on credit cards at 30% or less of your credit limit, so you'll have a good credit score. Let's see how this works out in an example: using a $5,000 credit limit, keeping the amount you spend at $1,500 per month.
- Pay Off Your Balance Each Month: You have to pay off the balance to really enjoy what you're getting out of credit card rewards. The interest charges can easily take away the value of the points or cash back for a month. Paying down your balance is the best assurance that your rewards will be free. According to NerdWallet, the average credit card interest rate is 19.5%. At such a rate, any unpaid balance can quickly add up, so it is essential to pay off the balance monthly to avoid interest charges.
- Look Out Regularly for Rotating Categories: Many rewards cards, such as the Discover It Cash Back card, have a quarterly rotating bonus category. You can earn up to 5% cash back in these categories, so it's good to keep abreast of changes and modify your spending accordingly.
- Redeem Rewards Wisely: More often than not, points and miles earn a better value when redeemed for travel rather than for a statement credit. Cashback has a relatively simple value and flexibility. For example, the Points Guy estimates that credit card points can be redeemed for as much as 2 cents per point, but cash redemptions for the same points might net only 1 cent per point. Think through redemption options so that you get the best benefits.
Avoiding Common Pitfalls of Credit Card Rewards
Here are some common mistakes to avoid:
- Avoid Overspending to Get Points: The biggest pitfall of rewards programs is the temptation to spend more just to earn points. For example, if you spend $200 just to get $10 in points, the math doesn't work in your favor.
- Be Aware of Annual Fees: Many rewards cards charge annual fees that can range from $95 to over $500 for premium cards. Make sure that what you earn in rewards pays for the fee. If you have low spending, look for a no-fee rewards card.
- Don't Have Multiple Rewards Cards If You Are a Credit Newbie: Some experienced users keep a stash of reward cards with different advantages. A first-time credit card or rewards user should opt for just one, though. Taking care of multiple cards will confuse you and will probably result in missed payments or overspending in one account. Experian found that people who carry five or more credit cards have an average credit utilization of 26%, which can hurt credit scores unless balances are paid off each month. Keep just one or two cards to start, for easy tracking.
Long-Term Strategies for Credit Card Rewards Success
Live below your means and make smart credit card reward use with these long-term strategies.
- Keep Track of Expiry Dates of Rewards: Most of the rewards always have expiry time if you do not redeem them within a certain time frame. Arrange reminders to use those points or cashback before they disappear.
- Autopay: Setting up automatic payments ensures you won't miss your due dates, which can help keep a good credit score and keep you free from late fees.
- Monitor Your Credit Score Regularly: Opening credit cards for rewards might affect your credit score, so keep watch on that. Credit Karma or apps like Experian will allow you to keep tabs on your score and see what's affecting it.
Unlocking to Maximize Credit Card Rewards
Credit card rewards are a great tool to use for saving, earning and even traveling for free when utilizing them correctly. Set up to spend according to the right rewards program, set some limits, redeem them at the right time, and you will maximize benefits without falling into debt. Spend less than you earn, pay off balances in full, and don't incur unnecessary spending, and you are on your way to enjoying your credit card rewards in a healthy financial way.
