Monday, July 26, 2010

Credit Cards Can Be Good, Too!

In a previous post, I talked about how credit cards can drain the life out of your finances if used incorrectly.  However, in the right hands, they can be used as a force for good.  Specifically, if you follow the rules that I outlined, they can actually make you money.

The key to making money from credit cards is to pick cards with no annual fee, pay off the balances every month, and use cards which pay you back with rewards.  Of course, in order to be eligible for these cards, you need to have a good credit rating.  If you are following my rules, though, this should not be a problem.

Now I will let you behind the curtain and share with you how I try to maximize my rewards.

There used to be only a handful of reward cards out in the marketplace.  Today, there are literally hundreds of them.  Each one offers different rewards:  cash, airline miles, hotel points, points that can be redeemed for merchandise, and so on.  Cards might offer different levels of rewards based upon your spending category.  It is enough to make your head spin.  Here are my simple rules of thumb for picking what cards to use:

1. Choose a card that gives you either cash or a reward for something that you would normally buy.  If a card rewards you will airline miles, but you rarely travel, it makes no sense to accumulate those airline miles.
2. Figure out the cash back percentage of the reward, and aim to maximize this percentage.  Some cards increase or decrease the percentage based upon the spending category or based upon reaching some annual spending threshold.  Pay attention to this fine print.

As for me, here is my current card lineup.  This arrangement works for me and my spending patterns, so your miles may vary.

For General Spending:  Fidelity Rewards American Express Card

This is one of the best cards that I have come across.  You get a whopping 2% cash back on all of your spending with no minimums and no limits.  For every $50 that you accumulate, Fidelity deposits that money in a Fidelity brokerage or retirement account.  I chose the brokerage account.  I used some of my savings to open a brokerage account with Fidelity and parked my money in a Money Market Fund, which is the equivalent of a bank Savings Account except without the FDIC backing.

They also have a Visa Signature version of this card, but that one only gives you 1.5% back on your first $15,000 in purchases.  There is no reason to pick this card, unless you work for Visa.

For Gas:  USAA World Mastercard with Gas Rewards

USAA is a provider of financial services to members of the U.S. Military and their families.  Therefore this card may not be available to everyone.  It has a Gas Rewards feature which rebates 3% on up to $150 of gas purchases per month.

For Special Quarterly Categories:  Discover More Card

Discover was one of the first credit cards that paid you cash back for your purchases, which is why this was one of my first cards.  However, it is not very good by today's standards.  Discover only pays you 0.25% on the first $3000 that you spend in a year, and then 1% after that.  However, they have rotating categories which pay up 5% back without any minimums.  The categories change every three months, and they ocassionally have special bonus categories that last one month.  There are two catches, however.  First, in order to get the 5% bonus rebate, you have to sign up online for each category.  If you do not sign up online, you do not get the bonus rate.  Second, there is usually the rebate in the special category is capped at some amount.  If you go above that amount, your rebate reverts back to the standard 0.25% or 1%.  This cap is usually buried in some fine print somewhere.

For Hilton-owned Hotels, Drug Stores, Grocery Stores, Phone, Cable:  Hilton Honors American Express Card

When I travel, I usually stay at a Hampton Inn (clean rooms, inexpensive, free breakfasts).  Because I stay there often enough, I can use the points that I earn by charging on this credit card.  You get 6 points for the categories that I listed above.  30,000 points is about the equivalent of a $150 hotel stay, so I figure that I am getting 3% back when I use this card in these categories.  Another advantage is that they usually give you a boatload of bonus points when you sign up.  I think I got something like 60,000 points for signing up.  I do not know what the current offer is, as it changes from time to time.  However, if you are going to sign up for this card, make sure you get your bonus.  One last advantage is that you are upgraded to the "Silver" membership in the Hilton frequent guest program.  From a practical standpoint, this means that you get 15% bonus points for every Hilton stay.

For Purchases:  Amazon Rewards Visa Signature Card

I happen to do a lot of purchases from Amazon, so getting this card made sense for me.  At the time, there was a signup bonus of a $30 credit off of your first purchase.  In addition, you get 3 points for every Amazon purchase.  250 points can be redeemed for a $25 Amazon gift card, so you are effectively getting 3% back on your Amazon purchase.

Wild Card:  Continental OnePass Plus Mastercard

Honestly, I don't use this card very often.  This card violates the "no annual fee" rule because there is an $85 annual fee.  Why do I have it?  There are two benefits to having this card that make it worthwhile.  First is that Continental waives the first checked bag fee for cardholders and all people travelling on the same reservation.  When travelling with a companion and each of us with a bag to check, this can just about pay for the cost of the card in one trip.  In addition, Continental runs offers where you get free miles just for signing up.  This card gives you 2 miles for every dollar spend on Continental airline tickets, and 1 mile for every other dollar spent.  Depending on how you use those miles, you might get 1 cent for every mile, give or take.  That means that it is rarely worth it to me to use this card very often, if ever.  Sometimes I will use it if a place does not take American Express.

So there you have it.  This is my current credit card reward strategy.  I am not saying that this is the best way to do it, but it works for me.  There are other great cards out there which might better meet your own personal needs.  Hopefully, though, this gave you some food for thought for how you can maximize your own rewards!

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