Last week I came across this fantastic Reddit post - Seriously, get and use a credit card - which contained a ton of information on how to get a credit card and why to use it, but lacked details on how to earn the most rewards and get the best value. So I wrote a guide that breaks down credit card rewards and explains how you can be earning rewards on your everyday spending. Also, this should go without saying, but rewards only work if you’re responsible with your cards and pay your bills in full!
I look at rewards this way - I’m going to spend what I normally do on expenses and make sure I’m using the best card. It’s not a reason for me to spend more to earn more as I’d be better off saving actual dollars. And with this approach, I’ve saved around $600-$1000 on flights and hotels each year by strategically using the right credit cards to earn and redeem rewards. Here’s how I’ve personally gone about managing multiple credit cards and getting the most value out of my everyday spend. Once you know how the system works it’s not all that difficult.
The Quick Intro
All the major banks, credit card issuers, airlines, hotels and even stores offer credit cards that earn you rewards back on your spending with really enticing sign on bonuses and perks.
There are two types of credit card rewards:
- Cash back
- Miles & points
The two things you need to focus on:
- Earning Rewards
- Redeeming Rewards
Let’s dive into each of these deeper:
Cash Back
Mostly straightforward, you earn a fixed percentage back on your credit card purchases in the form of cash. The % you get back is based on an mcc code multiplier or a specific merchant (like Target or Banana Republic).
For example, a Citi Double Cash card earns you 2% back on everything - so a $100 purchase = $2, and a Discover It card that earns 5% back on Amazon during a specific quarter in their rotating bonus calendar.
Some cards will issue your cash back in the form of a statement credit, let you apply your cash back when you’re paying your next bill or give you bonuses for redeeming your cash back into other accounts with that bank (like a savings account).
Where it can get tricky
Many cash back cards now have spending caps (earn 6% on groceries on the first $5000 and then 1% after), rotating categories (earn 5% back on category XYZ from Aug - Oct), excluded MCCs (Target and Walmart are not considered grocery stores for some card) and other weird rules and limitations. Here’s the terms and conditions for an Amex Blue Cash Preferred Card and the Reward Terms to learn which categories are included and excluded from bonuses.
Miles and Points
Some people will consider these two different, but in my opinion, these are both simply a virtual reward currency. The only difference between the two is how the credit card markets the rewards. For example, United MileagePlus Miles are different then Jetblue Points, but if wouldn’t make a difference if Jetblue Points were called Jetblue Miles.
With miles or points, you earn a multiplier on the net purchase amount of a purchase based on either the merchant or category. Miles are points are accrued and you can redeem them for travel (what I do to earn free travel because it’s usually the highest value) or a variety of other options like items or gift cards.
An example - let’s say I were to spend $100 on Amazon and the card I have offers 3x the points on Amazon purchases, I would earn 300 points or miles. Those convert to some $ value based on what I redeem for. Let’s say I could redeem them at 1.3 cents each, I would effectively earn $3.90 back on this purchase in the form of rewards - this can be a lot more lucrative versus cash back.
Where it can get tricky
Getting the most value for your points points & miles is tough because the $ value for what the rewards are worth changes depending on so many different factors. The option with the largest spread of reward values is typically hotels or flights. For example, if I redeem Ultimate Rewards from my Chase Sapphire card for Travel I "get 25% more value when you redeem for airfare, hotels, car rentals and cruises through Chase Ultimate Rewards. For example, 50,000 points are worth $625 toward travel." <- Directly from Chase's site. That means if I redeem my points for non travel, they're worth less.
Factors that impact the value of rewards include: airline, hotel, flight class, how far in advance you book travel, number of guests (hotel), availability, etc. There are also transfer partners to consider, like transferring Ultimate Rewards to United points. My recommendations for redeeming are in the Redeeming Rewards section below and I talk more about how these values change.
How to earn rewards
Obviously you can’t redeem rewards if you don’t have any. There’s a few ways you can earn miles and points:
- Using your credit cards (the quickest and easiest way)
- Applying for a new credit card and earning the sign on bonus
- Flying with an airline or staying in a hotel
- Dining programs and shopping portals
- Referring friends or buying points
By far, the most important and frequent way to earn rewards is through credit card spend. The fastest way is through a ton of sign of bonuses by applying for cards, but you’ll have to head to r/churning for advice on that. Just be mindful of how much rewards are worth - you don’t want to end up using the wrong card because of a higher multiplier and end up getting less value than you expected because it has a poor reward rate.
There isn’t much more complication to earning rewards outside of that list. The biggest issue you’ll most likely run into is remembering which card is best for each purchase, depending on what you earn at that merchant or category and how much the rewards are worth. I use a few different apps to help with this and discuss in “Apps I Use” section below.
Redeeming Rewards
This is hardest and most convoluted part of the entire rewards game. The reward programs purposefully make it difficult for you to redeem rewards - because the less value you get per each mile or point when they’re “burned” (industry term), the more profit they make.
Typically the highest value ways to redeem rewards are:
- Flights
- Hotels
Flights and hotels will normally net you the most value per mile/point. On United, for example, I’ve been able to redeem rewards for around 2.7 cents each domestically. Because I earn 2x points on travel and dining with the Chase Sapphire card and I can transfer at a 1:1 ratio to United, I effectively earn 5.4% back on dining and travel purchases. I use Chase as an example, but American Express Membership Rewards and Citi ThankYou Rewards also offer transfer partners.
The programs that have the most spread in reward values are the airline and hotel branded loyalty programs. Amex, Chase, Citi, etc (bank branded) will typically let you redeem for travel at a fixed value, whereas programs like Jetblue, United, Hyatt, Hilton, etc. have reward values that change based on a ton of different factors. Although this makes it confusing, it also makes it extremely lucrative when you find the best opportunities.
Once you’ve decided on the right card (or maybe you earned rewards by traveling with that brand), the best way to find the highest value is by searching. Take advantage of the flexible award calendars to find the cheapest redemption options and do searches to find hotels and flights in $ values on those same days. The formula for determining a reward value is:
(Cost of Travel - Taxes & Fees) / # of Rewards. An example United Flight might be: ($350.00 - $5.60) / 12,500 miles = 2.75 cents / mile.
There are sites that offer to crawl and find you the best, but I’ve never found any of them to be particularly useful and can’t vouch for their accuracy. Also - AVOID the services that will book your rewards for you and charge a fee of around $150. Talk about a waste of $$$.
Apps I use:
Much of this sounds manual, but there are some fantastic apps that have been amazing resources for me along the way. They’ve helped take away ~90% of the work.
- Mint - Mint has been able to help me get an understanding of my monthly spending & set budgets that are not reward focused. A great tool I recommend and I think this subreddit is highly familiar with Mint, so I won’t dive into too many of the details.
- Birch - Birch is the only app I’ve found that actually helps me optimize my credit card rewards in real time. They sync into + keep track of all my credit cards and show me when I didn’t use the right card on past purchases and the best card in my wallet to use when I’m shopping in real time. They’ll also recommend cards based on my spending habits which is great for first timers or if you have just 1 credit card.
- AwardWallet - Award Wallet is a nice tool to have because it aggregates all of my reward programs in one place. I think Birch could provide this functionality and it would give me one less app to use, but right now I’m ok with multiple apps. Prepare for spammy credit card email offers.
ThePointsGuy - Not so much of an app as it is a blog, The Points Guy is a nice site to frequent if you want to learn about the intricacies of the reward programs. It may be a bit much for some people, but is helpful whenever I have questions about my credit cards or reward programs.Marking out TPG due to extreme bias towards cards that pay him the most. Proceed at your own risk.
From the comments
- Reddit Threads - Check out r/churning
- Doctor of Credit
Other things to note:
- Loyalty program tiers: You can earn status on programs and reach tiers that help you earn even more bonuses. Sign on bonuses: They can be very enticing but can be dangerous if you get scooped into too many of them. Make sure you understand what a new card can due to your credit using a site like Credit Karma and only apply for a card where you will reach the minimum spending to earn that bonus. If the bonus is large enough (most are these days for the annual fee cards) that can be enough to score you a couple free flights or hotel stays.
- Annual Fees: Many issuers waive their annual fees in Year 1 to remove any friction from getting you to apply for their card. Don't let this come back to haunt you in Year 2 - make sure you get a card where your spending clearly outweighs the fees. I love the Birch app because this & sign on bonuses are built into their recommendations.
Tips:
- Put all of your eligible credit card spending on credit cards that earn rewards Have an understanding of your spending habits to figure out which card is the best for you Pay off your bill in full each month to avoid paying interest!!
- Be patient when redeeming rewards, use award calendars and do multiple searches to determine the best value
- Subscribe to your loyalty program emails, it’s a good way of keeping on track of current offers
- If you want to keep things simple, consider a cash back with a high, fixed earning value - like the Citi Double Cash, PNC Dining Rewards Card or Costco Visa
Please let me know if I missed anything!
*edit - added links for Amex terms and conditions and reward terms
Submitted September 18, 2017 at 09:36AM by workthepole4gold http://ift.tt/2hcQ1pC
