It has recently come to my attention that some of you are using a debit card to buy things. This guide will show you how to select credit cards that gives you a reward and when to use the right card for each purchase. Spoiler alert: the right card is never a debit card or cash.
Remember through all of this that carrying a balance past the billing cycle will result in 20%+ interest rates that will negate any rewards. Don’t carry a a balance, ever. Which means don’t spend on the cards more than you can pay in full. With the exception of most American Express cards which are a charge cards and cannot carry a balance, the rest of these pose that risk.
There are three basic types of reward cards:
- Cash back
- Transferable points
- Co-branded hotel, airline, etc. miles/points
Cash back
You spend $1.00 on the card and the issuer credits you back a fixed amount, usually $0.01 per dollar. Sometimes you can get this back in gift cards or cash. These cards are simple but offer few other benefits. There is often no annual fee.
Transferable points
You spend $1.00 on the card and the issuer credits you back a variable amount depending on what you purchase. The credit is stored in the issuer’s system until you decide to spend them or transfer them to a partner airline, hotel or rail system. The points earned are typically 1 point per $1.00 for most purchases, 2-3 points per $1.00 on special categories like travel or dining. These cards often have benefits like reimbursement for Global Entry fees, rental car insurance coverage, price protection, warranty extension, airline lounge access and reimbursement for a fixed amount of specified purchases. There is almost always an annual fee.
Co-branded miles/points
These cards carry the name of a particular airline or hotel and the points or miles earned go to your frequent flyer/guest account with that company. They usually come with some perks when you use that airline or hotel like earlier boarding, free checked bag, hotel status, airline lounge access and other benefits. There is often an annual fee.
The card you choose will depend on your goals.The most popular type is the transferable points card.
If you have status on an airline or hotel then their card might not be of use since the perks offered by the card are usually already available to you. The redemption rates on the cash back cards are fixed and low.
Let’s dive a little deeper into transferable points cards. The main issues for these cards are Chase (Ultimate Rewards), American Express (Membership Rewards) and Citi (Thank You Points) with an honorable mention going to Starwood Hotels. Each issuer allows you to transfer your points to a specific set of travel partners, usually one issuer point equal to one travel partner point or mile, but not always. The reason these are popular is that those points can be used to book first or business class airline tickets that might normally be thousands or tens of thousands of dollars for a modest number of points when using saver type reward fares. The redemption rates are then very high.
These cards also come with generous sign up bonuses to boost points. Sign up bonuses have spend requirements that must be met within a few months of opening the card. When you get a card just for the sign up bonus and then move onto the next sign up bonus card that is called churning and is a different but related subject. Likewise manufactured spend where you are spending money on a card only to use that money to pay off the balance is also a different and complex subject. Here we’ll talk about organic spend.
Looking Chase as an example you could have several cards and use the card that earns the highest number of points on each purchase based on the earn rate for the card on each transaction. Here is an example of a set of Chase cards that guarantee a minimum of 1.5 points per dollar and up to 5 points per dollar of earning.
- Freedom – 5 points on a rotating set of categories like gas stations, grocery stores, pharmacies and others. No fee.
- Freedom Unlimited – 1.5 points on all purchases no matter what category. No fee.
- Sapphire Preferred – 1 point on all purchases, 2 points on dining and travel. $95 per year fee.
- Sapphire Reserve – 1 point on all purchases, 3 points on dining and travel, instant credit on up to $300 per calendar year on travel. $450 per year fee.
It might sound insane to pay $450 per year to have a credit card but you get $300 of that back each year on travel expenses including things like flights, hotels, parking, Lyft, etc. making it effectively $150.
The Sapphire cards allow you to transfer points to partners, the Freedom card points can be transferred to Sapphire cards. A person would really only need to have one type of Sapphire card. This allows you to select the card that gets the best earn rate for each purchase and pool all of the points. You can then spend those points on travel directly where Chase pays cash to the airline or hotel and you use points instead of cash. For the Preferred redemptions like this allow you to get $1,200 in travel money for 100,000 points, Reserve gets you $1,500 in travel money for 100,00o points.
The more lucrative way though is to transfer these points to a partner airline and use those same 100,000 points to book an airline ticket that might cast $2000-3000 getting double the redemption rate and traveling in first/business class instead of coach.
Each of the other issuers for transferable points has similar cards and programs but it would make this post far too long. This post is intended to explain the idea of points and not compare the programs. All of this hinges on paying off your cards in full each month and never carrying a balance.
Shout questions in the comments and we’ll explore any area desired.
