Winning with Credit Card Rewards

Once you reach a point of credit and financial self-discipline where you only charge what you can pay off each month then Winning with Credit Card Rewards becomes easy. Just like taking candy from a sleeping Gerbil. Rule one is do not take on credit card debt because of reward offerings. Anything you gain is lost to the high interest rate you pay on balances owed.

For at least the last 15 years I have not paid any credit card interest. Best of all, the credit card companies have paid me 1% to 3% of my yearly credit card purchases. My rewards payments are usually $200 to $300 a year. If only I could get 1%-3% interest on my savings account too!

Here are the Winning with Credit Card Rewards success requirements:
  • You Will Win IF you buy only what you would normally purchase using the rewards credit card.
  • You Will Win IF you pay off the balance each month before it is due so that there is never interest applied.
  • You Will THEN benefit by using a rewards credit card for your purchases because these rewards credit cards offer free money for the taking, it is like everything you buy is on sale. But NEVER, EVER carry a credit balance.
If you are Currently Carrying a Credit Card Balance.

If you are still paying off credit card balances then make sure you have the lowest interest rate you can get. Reward card status or not. Instead of finding a rewards card to use find a 0% balance transfer credit card offering the lowest interest rate.

Whether you keep paying on the card(s) you have or you find a new 0% balance transfer card you need to stick to your plan and pay off your credit card balances first. Then never look back. Only then can you can turn around and use rewards credit cards to take out your financial revenge. Revenge on the very credit card industry that offered easy money to you at excessive interest rates before you became financially aware.

Winning with Credit Card Rewards With vs. Without fees

Which Reward Credit Card: With fees vs. without fees, and what about the interest rate?

When you look at reward credit card offers you will see various interest rates, reward rates, and yearly fee structures.

Interest Rate

If you are going to win at this you won’t be carrying a balance. EVER! If a card offering the highest rewards has a higher interest rate you don’t need to worry. Take the highest reward offering. If you plan on carrying the occasional balance then think real hard about whether this is a good plan for you. It is too easy to fall back into debt with credit cards.

Annual Fees vs. No Annual Fees

Generally you will find that rewards credit cards that have annual fees associated to them will waive the fee the first year. They will generally have a higher rewards payout. You could have a strategy to cancel the card after collecting the signing bonus and rewards. You must remember to cancel before the year-end deadline. That’s when the annual fee kicks in. Then you can just move to a new rewards credit card offer. If that isn’t something you would like to do then keep reading.

You must look at your potential card usage within the “Winning with Credit Card Rewards” rules (pay off each month). Then decide about taking a card with fees or one without fees even though it’s reward payout is less. Here is an example of what I mean. In this scenario we have two choices:

  1. A rewards card with a $99 annual fee but pays back 1.5% of purchases
  2. A rewards card with no annual fee that pays back 1% of purchases.
Fees vs. No Annual Fees – Example Scenarios Doing The Math

My annual retirement budget is around $40,000 a year of which I aggressively use my rewards card for $20,000 of it. If I use rewards card number 1 with the 1.5% payback I will receive back $300 – $99 annual fee = $201. If I use rewards card number 2 with the 1% payback I will receive back $200. A virtual wash with rewards card #1.

However, what happens if the offer for the card with the $99 annual fee was for 2% rewards? Then it goes in favor of it. $20,000 X 2% = $400 – $99 annual fee = $301. That is a 50% increase over the 1% ($200) reward from the non-annual fee reward card.

However again, if my credit card purchase amounts are lower it can also change the outcome of which rewards card type  is better. Say instead of charging $20,000 a year in purchases I only manage $8,000 of rewards card charges. $8,000 X 2% = $160 – $99 annual fee = $61. Where using a non-annual fee rewards card now comes out on top. $8000 x 1% = $80.

Knowing what you can charge and payoff each month is necessary to decide whether a card with a fee or without the fee is best for you. I have one of each. A no fee card that pays up to 2% depending on the spending category and the other is my Costco Citi Visa Card where the card and membership fee are tied together. It pays 1% to 3% depending on the spending category. I selectively use it within their purchase categories to get the maximum 2% and 3% rewards rate and of course all Costco purchases to offset membership and card fees.

Winning with Credit Card Rewards – Cash Back vs. Travel Point/Miles

You should also think about your personal situation and needs when comparing rewards offerings. If you are frequent traveler then taking travel related points or mileage over cash is a better value. Generally cash-back programs pay back less than a mileage or travel point program rewards card. That’s because giving cash back means the credit card company is giving you the full cash value.

Think about what you value most in your lifestyle. Do you prefer cash to assist with your budget? Or do you plan on often flying to far-off destinations so you would rather have the better mileage rewards?

In the past I preferred travel miles when my children were still at home because someone was always going somewhere. But since then I prefer cash. I would rather use the cash to help with my budget. In the future I plan to look for a great signing bonus offer and travel reward card or cards to help fund a planned international vacation.

Factor in Sign-Up Bonuses

Most reward credit cards offer sign-up bonuses that can be as high as $400. Don’t miss out on this free windfall of cash. Pay close attention to their spending requirements. They are usually tied to an amount of charges against the card within a certain time-frame. For instance, charging $5000 in the first 3 months of signing up for the card. You may want to “time” your signing-up with a planned large purchase coming. Think appliance replacement, auto or home repair, anything that you planned for and would be purchasing anyway.

So why do Credit Card Companies offer Rewards?

Of course they believe the game is rigged in their favor. Only the financially disciplined have any chance of Winning with Credit Card Rewards. So what is in it for them?

They can lure in new customers. In order to steal a good customer from a competing credit card company they use these rewards programs and sign-up bonuses to get people to change.

By offering cash back their customers are encouraged to use their credit cards more than they normally would have. I know I have the choice between paying with cash, using a debit card or using my rewards credit card so why wouldn’t I choose the rewards credit card? I am getting a sales discount on every purchase. This is what the credit card companies are counting on. It is awesome for them because their card gets used and they will at least get to charge the transaction fee to the sales merchant. Let’s face it, they also benefit because most of their customers will use the cash back rewards card without being able to pay off the monthly balance so the credit card company makes big money off of the interest they can charge.

However for those of us who are financially and credit disciplined, a credit card cash back reward is nothing but free money given to us for stuff we have to buy anyway.

Understand How Your Reward Credit Cards Work

Reward credit cards will total the amount of money spent during a given time period on eligible category purchases. Many cards only offer rewards on select items or within select categories. As an example a cash back rewards card will offer between 1% and 3% rewards on groceries or gasoline purchases. Some target specific areas for rewards announcing that they are the best card for people making business purchases or the best card for people who travel and drive a lot.

There are cards that offer rewards on everything purchased with it but usually at a lower reward rate around 1% to 1.5% as compared to a reward cards offering 3% but only on specific categories like gas, car rentals, hotels and air fare. Others may offer combinations of rewards, a 1% reward on general purpose purchases and higher rates on select category purchases.

Be aware that many cards will set a cap on the amount of rewards you can earn by setting a maximum dollar amount threshold for the year while others allow unlimited rewards. This is why people will have multiple rewards cards. When they hit a yearly threshold, say the first $7000 of purchases, they switch to another reward card until they hit its yearly threshold amount. Take care to read and understand the terms and conditions of your reward card or the one you are targeting to get so you understand what kinds of purchases are rewarded.

What about taxes on the rewards that are paid?

That is another beauty about credit card rewards. The money they pay you is not taxable. Unlike savings account interest and dividends you receive of which you have to claim on your tax forms the credit card reward amounts paid to you are not reportable. That is because the IRS considers them as rebates or discounts instead of income or passive income.

This also applies to any rewards sign-up bonuses because they are tied to a specific spending and timeline requirements unlike a sign-up bonus that you might get for opening a savings or checking account at a bank. Because all you did was open an account and it is not tied to purchases, it is taxed as Interest or Dividends and you can expect a 1099-INT to file with your taxes.

This tax-free status makes the 1% to 3% credit card rewards cash or travel miles/points value worth even more, from 15% on up depending on your tax bracket.

Save pagePDF pageEmail pagePrint page