Are Credit Card Rewards Worth It? – Cash Back, Travel, and More!
It is no secret that I love credit card rewards. In fact, they are one of the only reasons that I actually use credit cards. Yes, credit cards help my credit score. But once you reach a certain point, their impact is tiny compared to a mortgage or other loan. But does the risk of using a credit card really warrant the rewards? Often I see credit card rewards get misrepresented and cause some confusion so let’s clear some things up.
What are credit card rewards in the first place?
Credit card rewards are given to you in three different ways. There are signup bonuses, cashback, and reward points. Each card will have a different reward setup and may combine these different types. The purpose of rewards is to incentivize you to use that card over a competitor’s card.
I don’t try to hide the fact that I have 9 credit cards. I know that sounds like a lot, but the only reason is to collect these rewards. Now, I’m going to go over each type in a minute but let’s talk about if it is worth the risk.
My question to you is, what risk?
To be frank, I see no risk in using a credit card. I simply have to use a credit card the opposite a bank wants me to. You see, banks only make money on credit cards when someone has to pay interest on that card. If you read my article How Do Credit Cards Work? – A Simple Guide With Examples then you know we NEVER pay interest on a credit card because we follow the golden rule.
Pay off your credit cards IN FULL every single month and never carry a balance.
I have typed that phrase out a couple of dozen times and it will forever be true. If you pay off your card in full, then you’ll never pay interest and when you do this. This means the rewards are FREE. Yes, you are getting something for free because you are doing the opposite of what most people do and what the banks want you to do.
Of course, there is a risk if you don’t have the means, self-control or education to maintain your credit card without paying interest. Don’t worry though, you are taking the time to read articles like these to give yourself a better opportunity and never have that problem.
Now, let’s get into the different types of rewards.
The first type of credit card rewards I want to talk about is the most common and that is cashback. Cashback is as simple as it sounds. You spend money and then you get a certain percentage in cash back to your account.
I posted an article a couple of months ago titled Why The Chase Freedom Unlimited Should Be Your First Credit Card. That card gives you 1.5% cashback on all purchases. Another good option is its counterpart the Chase Freedom. This card gives you 1% on all purchases but additionally lets you rotate different categories each quarter for 5% cashback.
That’s a lot of percentages I know, but cashback is a great option for people who don’t want or know how to use reward points. Or frankly, people who don’t care about them and just want some incentive to use a credit card.
Just to put some numbers in front of you, let’s say you spend $1,000 a month on your Chase Freedom Unlimited. You would then get 1.5% or $15 back. While it doesn’t seem like much, it really can add up. In a year, that’s $180. That’s enough for that Apple Watch you’ve been checking out!
To see a list of the top cashback card options, check out Nerd Wallet’s article here. These guys do a great job of breaking things down so no reason to be redundant.
Okay, now let’s get to my favorite type of credit card rewards; reward points. I’m not going to sugarcoat it. If you think cashback is confusing, then understanding reward points can really throw you off. Just know that by figuring out how to leverage these points, I haven’t paid for a flight in almost 3 years! Yes, in a roundabout way this means I’ve been traveling for free.
To put it simply, reward points work by giving you a certain number of points per dollar spent. Where it can get confusing is trying to decipher what purchases allow you to earn points, how many points you earn per purchase and when/how you can redeem the points. Yes, that’s a lot, I know.
Let’s start out with how you earn them. On my Amex Gold, card when I buy groceries or spend money on dining out I earn 4x points. But when I buy gas I just get 1 point per dollar spent. Of course, this is just one example of one credit card.
You can see how it gets confusing with the dozens of options out there.
Since I’ve already got you somewhat confused, let’s jump over to when you cash them in. Unfortunatley (or fortunately however you look at it), points are worth different amounts when you cash them in.
For example, if I choose to use my 50,000 points and just get cashback on my Chase Sapphire Reserve, then I’ll get $500 cashback. But if I take those same points and use them to book a flight through the Chase Ultimate Rewards Portal, then they are now worth $750 of air travel, or 50% more. If you need the money right away, cashback is the right option but if you can use your points strategically, you can get quite a bit of dollar value out of them.
You also have the option to transfer points to partner programs but doing that is out of the scope of this introduction to credit card points.
Again, this will all change from card to card. The best advice I can give to you here is write down a list of your card or cards and list their top 3-5 perks so you remember them.
Enough with the confusion, let’s get to the easy type of credit card rewards; sign up bonuses. A signup bonus works in two ways. The first is pretty self-explanatory. Simply enough, when you sign up and get approved for a card they automatically give you a bonus, be it points or a dollar amount.
The second and more common is when you spend a certain amount in the first couple of months you earn a bonus. For example, the Chase Sapphire Preferred has a signup deal where if you spend $4,000 in the first three months, you earn 60,000 reward points to your account. Like we talked about earlier, that could equal $750 of air travel, which is a pretty sweet deal in my opinion.
You may have heard the term credit card churning before and sign up bonuses are one of the main reason for people doing it. Put simply, people will sign up for a bunch of credit cards over time (churn) just to get the sign-up bonuses.
Personally, I somewhat churn because it is absolutely effective. Credit card companies aren’t dumb though so they put in a policy like Chase’s 5/24. Which only allows you to apply for 5 cards every 24 months. If you want to learn more about churning then make sure you sign up for my email list above.
The Rewards No One Talk About
There are other rewards that people seem to miss or undervalue all together. They are not as obvious as cashback or reward points, but they can make a HUGE difference.
To list out every single one I can think of would be ridiculously long so let’s just give you some highlights so you have an idea of what to expect. If you are ever looking into a credit card, then they will outline all of these on their offer statement.
- Travel perks: The Chase Sapphire Reserve and the American Express Gold Card both refund you when you get Global Entry and TSA Precheck. In addition both of these cards, along with others, give you access to airport lounges. This is done through Priority Pass with Chase and the Centurion Lounges with Amex.
Other cards may give you a free upgrade or allow you to bring a free checked bag which more often than not would have cost you money. My last example for travel perks is that the Amex Gold Card gives me a $100 airline credit. I can use this to pay for my checked bag or get beverages onboard.
- Insurance: Some cards, especially those that are Chase, give you insurance on things you purchase up to a certain amount per year. It’s as easy as making a quick claim if something is lost, stolen, or damaged, and they’ll refund you the cost.
Another example is that my Chase Business Ink Preferred has phone insurance included. So when (not if) I drop my phone and crack the screen, it will be covered.
The last item under insurance, and somewhat ties into travel, is rental car insurance. This saved my group a couple of hundred dollars alone when we went to Iceland. To me, this is a huge perk and it also comes with roadside assistance.
These are just two of many examples of perks. Unfortunately, most people don’t understand what all their credit card offers them. Take a little bit of time to read the fine print and take advantage of everything you can!
Putting It All Together
You may be asking yourself, is this really worth all the work? Well, to be honest, there isn’t any work that goes into it except you need to spend money. This should be done like you regularly do and pay off your credit card in full every month.
This sounds too good to be true but people are catching on and I don’t want you to be left in the dust. How do I know? Over the last couple of months, I’ve seen articles that have hinted at the idea of these credit card companies scaling back their reward programs. The only reason a company will ever scale anything back is that they are starting to lose money.
Who are they losing money to? Me, you, and everyone else who is taking advantage of credit card reward points.
The picture below is a screenshot from my points wrap up that I calculate monthly. Like always, I’m not showing this to you to brag but rather show you what is possible through some small strategic planning. I included my frequent flyer points as well because they are another great source for free reward points. That’s a topic for another time though.
You’re smart, you can read the table. Right now I have almost $3,500 in total reward points just waiting for me to use them for something fun. These can be redeemed for cash, flights, rental cars, and basically, anything else you can think of. As you just read, my favorite use by far is for flights.
This is somewhat getting out of the scope of this article but the multiplier column above varies. I talked a little about this in the rewards section but it is due to what you redeem your points for.
The Bottom Line
What do you think? Are credit card rewards worth it?
If you can follow the golden rule (like always) then you too can benefit from the amazing perks of credit card rewards. Just imagine the joy of seeing cask back hit your account. Or knowing that you can pay for your flights with strictly reward points and nothing out of pocket.
Like everything in this confusing personal finance world, it will take time. You won’t wake up one day and be an expert on this or have a system that works for you. I have been doing this for over five years and I’m still making changes here and there.
If you have any questions about credit card rewards then don’t hesitate to reach out and ask via the Contact Me tab.
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