Introduction To How To Earn Rewards From Your Credit Cards
An Introduction To How To Earn Rewards From Your Credit Cards.
This is a guest post by Mr. CC from Ask Mr. Credit Card
*Follow The Golden Rule*
The first and last rule of reward cards has always been this: Do not even think about reward cards if you do not pay off all of your cards, in full, and on time, every single month. The reason is obvious and simple, yet there are a surprising number of people paying interest on reward cards. The interest you pay will always dwarf any reward you see. A good reward earns 2-5% back on your purchases, yet paying interest costs you many multiples of that. If you carry a balance, find a card with the lowest interest rate. If you pay every bill in full, and you are merely using credit cards as a method of payment, you are now ready to use reward cards if not to make your rich, certainly to make you feel rich.
*Find A Goal*
Reward cards take many forms, from simple cash back, to elaborate point systems that can be redeemed for travel and merchandise. For me, the ultimate goal has always been travel, and here is why: First, travel is a luxury, and even when I was an entry level employee eating ramen noodles right out of college, I still wanted to take a nice vacation. I would book a vacation to Europe every year or two, and my friends thought I must be rolling in money. In reality, the flight was a reward ticket, and I often stayed in hostels for $10 a night. These days, I am more likely to book a business class ticket overseas. On our last trip, my wife and I concluded we were probably the only passengers in business class who took the bus to the airport. Tell me you don’t feel rich when the flight attendant wheels by the dessert cart and asks you to choose!
Second, travel rewards credit cards have the highest return on your reward card spending. While a good cash back card earns a mere 1% on most purchases, a properly chosen travel reward card can offer benefits in the 3% to 6% range. Amazingly, luxury travel produces a higher reward than economy travel. A premium international airline ticket or room in an upscale hotel can be redeemed for fewer points, per dollar value, than an economy seat or hotel room.
Perhaps travel just isn’t your thing. In that case, you are almost always better off with a cash back card. This way, the reward is earned every month, and that money stays in your bank account earning interest. While there are many reward cards that offer merchandise rewards, rarely does the value of the merchandise exceed what you could have earned on a cash back card. This brings us to the next important thing to consider:
*Always Keep In Mind The Opportunity Cost*
If I earn 50,000 frequent flier miles on an airline travel card by spending $50,000 over several years, and then I redeem those miles for an award ticket to Europe, is my flight free? Of course not. I could have easily earned $500 in cash if I had the most basic 1% cash back card. I could have earned both interest on the $500 the whole time, and I could have earned frequent flier miles on flight had I paid for it. If the ticket could have been purchased for $600 or even $700, I was really just wasting my time with the “award” and I haven’t earned a thing! If however, I had redeemed an award for a ticket that would have cost me well over $1,000, now I have spent my time wisely and earned a valuable reward. Frankly, I would have preferred to earn 100,000 miles for a business class ticket worth $6,000. In reality, I combine miles gained from flying and other airline partners to achieve these premium rewards. With most of these partners, there really is no opportunity cost, the miles are a gift.
The opportunity cost must also be considered with merchandise rewards. Consider both the cost of the merchandise you are redeeming, and perhaps whether you could have bought that product on ebay, craigslist, or some other place for far less than at your reward card affiliate.
*The Big Picture*
Ultimately, to think and feel rich, while maximizing your reward credit cards, you have to look at all of your expenditures. If you wisely use a combination of reward cards, you might just save 2-3% on your annual spending. If this amount is worth more to you than a potential travel reward, so be it. For me, I feel rich when I forgo the 1% cash reward, and dedicate my spending to travel reward cards. Taking that business class vacation at an economy class price is my way of feeling rich.
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