Credit Card Rewards and How to Think About Them

Dylan Potter, CFP®, Vice President, Wealth Manager

If you are using a debit card, you’re spending money and not getting anything back in return. It’s like paying with a check. When you use a credit card though, every time you pay for shopping online, eating at a restaurant, groceries, or other day-to-day expenses, you’re likely earning valuable points and miles that can be used in a variety of ways!

Hi, I’m Dylan Potter, Dylan Potter, CFP® and Vice President, Wealth Manager at Howe & Rusling. In today’s episode of Street$marts, I want to talk about credit card rewards and how to think about them. So, let’s get into it. If you are using a debit card, you’re spending money and not getting anything back in return. It’s like paying with a check. When you use a credit card though, every time you pay for shopping online, eating at a restaurant, groceries, or other day-to-day expenses, you’re likely earning valuable points and miles that can be used in a variety of ways!  

Now here’s the first and most important rule of points and miles: Pay your credit card bills on time and in full every single month. Never spend more than you can afford or buy things you wouldn’t have normally bought with cash. If you need to use a credit card for a “stretch purchase,” choose the card with the lowest interest rate, not the one with the best reward points. 

Simply put, points and miles are a type of currency. You earn them every time you make a purchase on a rewards credit card and can use them later as you see fit. Broadly speaking, credit card rewards can be broken down into three major buckets: cash rewards, airline miles or travel perks, and flexible points. 

Each of the three types of rewards has advantages and disadvantages, and the best will depend primarily on an individual’s preference, personality, and lifestyle. 

Cash Back Rewards

The simplest type of credit card reward is cash back for purchases made on the card. A card might offer 1% cash back on purchases that can be redeemed as a credit or deposited into their bank account. For example, the Citi Double Cash card offers 2% cash back on all purchases. For someone who values simplicity, wants cash back, and does not want to think about which card to use for a given transaction, this style can be attractive. The user knows exactly how much the rewards will be worth and they can be used for any spending needs. Personally, because I shop almost exclusively through Amazon (I have kids and a dog…and am a loyal Amazon shareholder), so I use the Amazon Prime Visa Rewards Card which offers a strong 5% cash back in rewards at Amazon.com with an eligible Prime membership, 2% cash back at restaurants, gas stations and drugstores and 1% on all other purchases. 

Travel Points/Miles

Miles and/or points earned for a specific airline or travel company’s loyalty program through the use of a co-branded credit card is the second type of reward. For example, an airline credit card might offer one frequent-flyer mile for each dollar spent on the card. Most travel companies offer some type of program, which reward users with frequent-flyer miles or points that can be redeemed for travel, upgrades, or other perks while flying or staying in an affiliated hotel. Many of these cards offer non-rewards perks and benefits like free checked bags or travel credits, but they also come with an annual fee. Think carefully about opening cards with annual fees: Will you get more value of the card than you will pay on a yearly basis? Some common examples of popular travel-centric credit cards are: 

  • Citi American Airlines Card
  • Delta SkyMiles® Gold American Express Card
  • Southwest Rapid Rewards® Priority Credit Card

Flexible Points

The third type of credit card reward consists of points issued directly by a credit card company that can be redeemed for a variety of uses. For example, the credit card user can opt to receive cash back as a credit on their statement, book travel using the points (instead of paying with dollars) directly through the card provider, or can transfer points to be used as travel points/miles with a range of airline and hotel partners.

The optionality associated with these cards makes them a great addition to any wallet. For example, while miles earned on a United Airlines co-branded credit card can be used to book flights through United, Chase Sapphire Preferred Rewards points can not only be converted into United miles, but also into miles on 14 other major affiliated carriers as well as hotel points for all Hyatt affiliated resorts. Some common examples of flexible reward cards are: 

  • Chase Sapphire Preferred® Card
  • Capital One Venture Rewards Credit Card
  • Citi Premier® Card
  • The Platinum Card® from American Express

Sign-Up Bonuses 

The easiest way to accumulate points and miles is through sign-up bonuses. They vary from card to card, and each card comes with advantages and disadvantages. The sign-up bonus is just one piece of the puzzle.

Keep in mind that the timeline for a welcome bonus to appear in your account varies from issuer to issuer. AMEX takes about eight to 12 weeks, while Chase takes six to eight weeks, Citi takes eight to 10 weeks and Capital One pays within two billing cycles. Our best piece of advice is to hit the minimum spending requirement way before your statement closing date just to be safe. 

Remember it might seem lucrative to sign up for many cards during the course of a year. While this is possible, credit card companies do impose restrictions on how many cards an individual can have with the company and how frequently they can receive sign-up bonuses. Additionally, your credit score comprises a variety of factors, including payment history (35%), amount of debt owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%). Having multiple credit cards won’t negatively impact your credit score if you keep your utilization rate low and pay them off in full every month. However, every time you apply for a new credit card, your score does take a small hit (typically 2-5 points). While the dip is temporary, opening multiple credit cards is a fine line to walk and a decision that should not be made lightly. 

Call to Action

Look at your monthly or annual spending habits. If a certain category of purchases or brand continually resurfaces, you should research a rewards card to fit your lifestyle! You may not be a traveler, but you may enjoy regular restaurant outings instead so choose a card or two that align with your lifestyle and use their rewards programs to the fullest! Remember to pay off your card in full every single month. 

Thanks for tuning into Street$marts, and we hope to see you next time!

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