Traveling for free sounds too good to be true, right? Or getting a check for hundreds of dollars on purchases you make every year probably sounds like a scam?
However, it really is possible through the power of credit card rewards. If you are looking to travel like Kim K, sit in economy on Spirit Airlines for free, or simply save money every month, this can all be done with the power of credit cards.
My parents instilled in me from a young age the importance of maintaining your credit score, and the value that can be extracted when managed properly. I remember growing up my mom was constantly taking advantage of credit card rewards with a near perfect credit score which allowed us to travel nearly for free and save thousands of dollars to boot.
She would also use a cash back credit card throughout the entire year, and then use that entire check towards Christmas presents. Pretty nifty rewards on money you would be spending anyways.
Once I turned 18, I immediately began churning through credit cards to boost my credit history and earn rewards. Since then, I’ve earned and burned through millions of points and miles to travel for next to nothing. And I have over $300,000 in available credit and a nearly perfect credit score at 25 years old.
What This Guide Is Going to Cover:
1. Why Credit Cards Even Offer Rewards
2. Cash Back Credit Cards
3. Points & Miles Credit Cards
4. Co-Branded Credit Cards
5. Bank Credit Cards
6. How To Strategically Use Your Credit Card Points
7. How Much Credit Card Points Are Really Worth
8. My Credit Card Points Pro Tips
Why Do Credit Card Companies Offer Rewards?
Customer loyalty programs work incredibly well. That is why nearly every large brand in America has one. It adds to the customer experience and eventually leads to a better business relationship between the vendor and customer. In an incredibly fragmented economy with an endless amount of product availability, businesses are dying to retain customers. That makes these programs an invaluable part of businesses. In simpler terms: companies want to keep you as a customer and will do what it takes to do so.
The largest business reason to keep you as a credit card customer is so you spend more money. However, there is incredible value in using these programs responsibly.
Richard Kerr, behind the blog AwardWallet.com is a large believer in these programs and their value to consumers. “The amount of competition between credit card issuers is at an all-time high,” Kerr told The Money Manual. “That means we, the consumers, have the power to decide which programs and products to utilize and also the power to give companies feedback on their programs. Loyalty programs know we have a plethora of choices today and the education level on how to use these programs continues to increase exponentially. Do your part to learn how to maximize your program of choice and if you discover it isn’t providing value, leave it and tell them why you are leaving.”
Credit card companies and travel brands alike are begging for your business and loyalty and will reward you kindly in return. Whether it is Delta Airlines, American Express, Hilton, Marriott, Avis, or any other large business, they want your business and loyalty.
Just like many other things in life, use credit cards responsibly. Credit cards are perfectly synonymous with fireworks. When used appropriately, it is a show of beauty. When used irresponsibly, they will blow up in your face.
Here is everything you need to know about credit card rewards.
Reward Credit Cards 101
The two main types of credit card rewards are either points or cash back. In short, the credit card companies incentivize you to spend more in the form of cash back or points to be redeemed for travel or other items.
Cash Back Cards
Cash back cards are simply that – they offer cash back for your purchases. This typically comes as a check or statement credit.
This is a great way to earn money back on purchases you would make anyways.
I recently got my yearly cash back check for my Costco Anywhere Visa® Card by Citi (which is my all-time favorite cash back card) and it was just under $600. My check was emailed to me and I had to visit my local Costco to cash the check.
However, not all cash back cards are the same. Each card will have its own unique earning categories.
Some cards will just give a standard earning percentage like the Capital One® Quicksilver® Cash Rewards Credit Card. This card earns 1.5% cash back on all purchases. If you spend $10,000 a year, that is $150 back per year!
Other cards have diversified spending categories like my favorite Costco card. This card will earn you 4% cash back on US gas purchases up to $7,000, 3% on travel and restaurants, 2% on Costco purchases, and 1% on everything else.
According to the Bureau of Labor Statistics Consumer Expenditure Surveys, the average family spends $3,000 on gas per year. If you were to put all of this on the Citi Costco card, that would be an extra $120 back in your pocket.
If you are looking to commit to a cash back card, look at your expenses carefully. Pick a card that will net you the most cash back possible.
Also, be sure to look at introductory offers. Many cash back credit cards will give you an offer like “Spend $1,000 in the first 90 days and earn $150 back in statement credit.” Many credit card fanatics will earn several of these in a year and use those savings in other places. My mom would churn through these regularly and earn up to $1,500 per year doing this.
Another thing to keep in mind: Some credit cards mandate that you can only redeem cash back in increments, such as $25. So, if your cash back is $380, you will only be able to redeem for $375. That $5 left over will be waiting until you earn another $20. Keep this in mind when selecting a card if you are needing that cash back quickly.
Be sure to account for any possible annual fees with these cards as well. If there is an annual fee, though, don’t scoff at it. Many times, these annual fees can be recouped quickly if you stay organized and use the card to its fullest potential.
An example of this is the Blue Cash Preferred® Card from American Express. It does have a $95 annual fee, but the earnings can be significant with the cash back categories. It offers 6% cash back at US supermarkets, up to $6,000 and 3% back on US gas. If you take the average family in the survey above, that family could earn a potential of $480 cash back just at the supermarket and on gass. If you subtract the $95 annual fee, you are looking at a net gain of $385.
Points & Miles Credit Cards
If you are an avid traveler like me, cash back cards aren’t getting you the largest value possible. My baseball analogy for cash back cards is that cash back cards are great for hitting singles and doubles all day long. However, if you want to hit triples and home runs, points and miles cards are the way to go.
Admittedly, points and miles cards can get tricky and complicated. Trust me here: It’s worth the effort.
Each points and miles credit card will have earning categories similar to cash back cards. But, instead of of cash back, you will earn points or miles.
Co-Branded Credit Cards
Co-branded credit cards are the most common points and miles credit cards. These are cards like the Gold Delta SkyMiles® Credit Card from American Express or the Southwest Rapid Rewards® Premier Credit Card, just to name a few. The points you earn will be associated with the brand of the card, and the bank (Chase, American Express, etc.) who “hosts” the card.
The points can be redeemed for many things including free flights, free hotels, gift cards, magazines, and so much more.
There are several benefits to having co-branded credit cards. Here is a quick list of card benefits of the Chase IHG® Rewards Club Premier Credit Card, which is considered a “mid-tier” card.
- A free night after each account anniversary.
- Platinum Elite status (this means potential room upgrades and extra perks to each stay)
- Baggage Delay Insurance (reimburses you for essential purchases like toiletries and clothing for delays over six hours)
- Lost Luggage Reimbursement (reimburses you or immediate family members for damaged or lost bags while flying)
- Purchase Protection (covers new purchases for 120 days against damage or theft)
- Trip Cancellation/Trip Interruption (if your trip is cancelled or cut short by sickness, weather, or a similar situation, you can be reimbursed)
- $100 credit every four years for Global Entry or TSA PreCheck
- No foreign transaction fees
Keep in mind this card does have a $89 annual fee, but it is obvious that this can be recovered quickly when this card is used to its fullest. Even with just the free night alone that fee is recoverable. That is the key to credit cards with annual fees.
However, the largest downside to co-branded cards is your earnings can really only be used in one place. The IHG card I mentioned above earns IHG points that can only be redeemed at IHG hotels.
Bank Specific Credit Card Rewards
Many of us have heard of cards such as the Chase Sapphire Reserve® or the Platinum Card® from American Expres. These cards are the “holy grail” in the credit card industry because of the versatility of the points earned.
But what do these cards earn exactly? They earn bank specific points that can be transferred to several partners.
For example, if you have the Chase Sapphire Preferred card, you are earning Chase Ultimate Rewards points. You can transfer Chase Ultimate Rewards points to many travel partners, including:
- Aer Lingus
- Air France/KLM
- British Airway
- Singapore Airlines
- Southwest Airlines
- United Airlines
- Virgin Atlantic
- Ritz Carlton
And with American Express, you can transfer their Membership Rewards to:
- Air Canada
- Air France KLM
- All Nippon Airways
- Cathay Pacific
- British Airways
- Delta Air Lines
- El Al Israel Airlines
- Etihad Airways
- Hawaiian Airlines
- Singapore Airlines
- Virgin America
- Virgin Atlantic
- Choice Hotels
- Hilton Hotels
These types of cards are highly coveted because the points can go to so many different places. And the card themselves come with incredible benefits.
For example, the Chase Sapphire Preferred® (which many consider to be the best beginners travel rewards credit card out there) has the following perks…
- Earn 60,000 Ultimate Reward points after spending $4,000 in the first 3 months.
- Earn 2 points per dollar on travel and dining.
- Incredible travel protection including trip cancellation insurance, auto rental collision damage waiver, baggage delay insurance, trip delay reimbursement, travel and emergency assistance service, and more.
- No foreign transaction fees.
Another layer to this entire conversation is not only points and miles, but “status”. Many of these credit cards in this space will come with automatic status within a loyalty program.
For example, the Hilton Honors American Express Surpass® Card gives you automatic Gold status with Hilton. This alone provides value to you as you are eligible for room upgrades and extra perks during your stays.
I currently have Diamond status with Hilton by having the The Hilton Honors American Express® Aspire card and have received numerous perks and upgrades by simply having it.
How To Strategically Use Your Points & Miles
First Things First
Before making any sort of decision on a credit card make sure to ask yourself a few questions:
- Are you in a financially stable place to hold a credit card?
- Are you responsible enough to have one without overspending?
- Is your credit score in a decent place to be able to apply?
If you have answered yes to the above, the key to getting started is reverse engineering.
Figure Out Your End Goal
- Are you an economic/minimalist traveler wanting to stretch their points?
- Or, are you an ultra-luxury traveler looking for two-weeks in the Maldives and to fly first class?
Once you figure out your goal, you can look at what card best suits you. Do not pick one based on some blog you read or a friend’s recommendation. It is a personal decision you should make based on your situation and goals.
What Are Credit Card Points Worth?
I cannot say this enough: treat your points like cash. All points have value, just like dollars. You’ve spent hard earned money to get these rewards, use them wisely.
While the value of these points is incredibly difficult to pin down, the general rule of thumb that I follow is:
Hotel points valued at half a cent (.005) per point.
Airline points value at 1.5 cents (.015) per point.
Bank specific points value at 1.75 cents (.0175) per point.
So, that free hotel stay may sound great, until you realize you have overspent in regards to point value. Just like cash, spend them wisely – they aren’t unlimited.
My Credit Card Points Pro Tips
As someone who geeks out on credit cards, here are a few quick tips if you want to start earning credit card rewards.
1. Start slowly! Don’t leave this article and apply for five cards at once. Take some time, see what card fits you best, and give it a shot.
2. Constantly re-evaluate your situation. Once I became more financially stable, I decided to flip my strategy from cash back to points and miles. Also, new products, credit cards and loyalty program changes happen frequently. Your strategy should frequently change as well.
3. Plan ahead. If you have a large expense coming up like a home remodel or medical bill, be sure to see if you can apply for a new card to earn another sweet minimum spend bonus.
4. Do not fear rejection. Everyone has been denied a credit card at least once in their life. Give the credit card company a call to their “reconsideration line” to see if there is a way you can fill in the “gaps” in your application. Some banks will need employment verification, income verification, or you might have accidentally typed something incorrectly on your application. Find the bank who hosts the card and Google search “XYZ Bank reconsideration line.” Give them a call and work together with them. Don’t take no for an answer!
5. Get organized. Create an excel spreadsheet or some other way to keep track of what cards you are using and your expenses. Use something like AwardWallet to keep track of the points you are earning. It can get messy fast.
Credit cards aren’t just for free travel – they are financial tools that can better your financial picture and life.
Unfortunately, credit cards do have an incredibly negative connotation, and for good reason. When used irresponsibly, it can get ugly fast.
I’ve paid my fair share of interest when times were tough, but in the end I’m way ahead. My wife and I (we’re 25 and 23) have been able to travel to incredible places because of the power of points and miles, and you can to!
Feature Image: Twenty20