How would you like to receive 2% or more of every purchase you make? That is just an example of what is being offered to credit card users in the form of rewards.
Those who have come to realize the possibilities of credit card rewards have discovered that there are dozens of competing products. No card or group of cards is suitable for everyone.
So how do you choose which credit card to use? It is not easy, but there is a proven way to ensure that you receive the most value in exchange for your credit card spending.
Who should earn credit card rewards?
First, it’s important to remember that credit card rewards aren’t for everyone. Unfortunately, those who carry a balance should not use a reward card, because the pursuit of rewards means that the cardholders with a balance lose the chance to receive the lower interest rates offered on non-reward cards (ie the best low APR credit cards). Since the savings from the lower interest rates far exceed the value of cash, points or miles, it is best to completely ignore rewards. Also, people struggling with credit card debt should not be motivated to spend more to earn rewards.
The ideal user of a travel credit card is someone who pays his full balance every month and likes to travel. Travel reward card users don’t even have to travel a lot to take advantage of the opportunities these cards offer – many earn points and miles all year round and use them only occasionally. Of course, those who travel regularly for work or leisure can benefit greatly and quickly earn rewards to see repeated, frequent travel benefits.
How to evaluate cashback rewards
Calculate cashback rewards
Once you have determined that you can save money by using reward cards, your goal is to maximize the value received for every dollar spent. This calculation is simple for simple cashback credit cards that return a fixed percentage per dollar spent, but becomes more complicated when calculating the present value of a card that offers different rates of return for spending at different categories of sellers.
For example, the Trust Earnings card from Costcorp and American Express (a Money Crashers partner) offers extra money back for gasoline purchases, in addition to the money that is refunded for other purchases. There are even cards that offer cashback bonuses for purchase in spending categories that are rotated every few months, such as the Chase Freedom Card.
It can be almost impossible to calculate your total amount of money with a card like this, because you never know which categories will receive the most favorable rates at a given time. Most cards, such as the Blue Cash Preferred Card from American Express (a partner of Money Crashers) and the Chase Freedom Card impose restrictions on the amount of expenses that are eligible for the bonus percentages of cash.
Carry multiple cards
Customers can choose to take multiple cards with them, so that they can use the one with the highest current return at a particular dealer. This strategy works well until the cardholder is overwhelmed by the complexity of carrying many different cards for different purposes. That’s why I recommend that most people limit their assets to the three or four cards that refund the highest amount for the type of purchases they make.
Finally, even the apparent simplicity of receiving money can result in the choice between different ways to receive the earned bonuses. For example, some cards offer an overview credit every month, while others send the cardholder a gift voucher.
Perhaps the most uncomfortable way to get a refund is the method used by the Costcorp True Earnings Card: customers have to wait until February of each year to receive a voucher at a Costcorp branch for money or goods. If the customer’s account is not open and has a good reputation every February, all awards are forfeited!
Calculate the value of points and miles
Bank-Run Travel Rewards cards
The most difficult rewards to calculate can be the ones who offer points or miles in a loyalty program. Some credit cards offer points or miles in a program run by the bank, such as the miles earned by users of the Capital One Venture Rewards card. With this card, two miles are earned per dollar spent, and these miles can each be exchanged for one cent as a statement credit against any travel expenses. Therefore, cardholders receive the equivalent of 2% back in the value of rewards for every dollar spent.
Co-branded travel credit cards
A more popular alternative is co-branded credit cards that offer points and miles at an affiliate, such as an airline or a hotel chain. Determining the value of these miles can be very difficult because their utility can vary based on the quality of the program and how you use them.
For example, credit card holders of an airline that receive the standard 1 mile per dollar spent don’t receive much value if they have to use 25,000 or 50,000 miles for a “standard” national economy class award ticket. If the actual value of the ticket is $ 500, they will only receive 1% or 2% back on their purchases.
On the other hand, if they are able to use 100,000 miles for a business class ticket to Europe, their award will probably be worth a few thousand dollars to Poy Crunchback. In this scenario, the cardholder has realized four to eight cents in value for every dollar credited to his or her savings card. Someone who spent the same $ 100,000 dollars on the best cashback (non-travel) rewards card that got back 2% would end up with just $ 2,000. Although some people prefer cash, others realize that the flight to business class to Europe is worth much more.
How to find the highest value when redeeming points and miles
The rewards with the highest value are usually found when cardholders redeem their miles and points for international business or first class air travel. Although these seats cost the economy class price several times, the prices require a relatively small number of extra points or miles. For example, many business class awards cost only 50% to 80% more than the same flight on the bus, and the truly luxurious international first-class seats with prizes usually only require twice as many kilometers.
Despite this relatively high number of miles or points required, buying such tickets with cash costs 5 to 10 times more than in the economy. Cardholders who earn hotel points face a similar situation, where luxury hotels get more in dollars per point than prices for free nights at cheaper properties.
What is the Award worth to you?
Airlines and hotels can return this enormous value for their premium award because it enables them to use surplus stock that would otherwise have been lost, such as an empty airplane seat or an empty hotel room. In other words, these prizes are not worth much to them. But what are these awards worth to you ?
Determine the relative value of rewards
It is up to you, the cardholder, to determine the actual value of these rewards, regardless of the original cash value applied by the airline or hotel. For example, I can redeem a prize for a business class seat that sells for $ 7,000, but unless I would have paid that amount under normal circumstances, I really wouldn’t save that much money. If the bus ticket costs $ 1,000, and I would have paid no more than $ 2000 to be upgraded, I should only estimate that price at $ 2000. If I used 100,000 miles for that price, I only got two cents in value of miles that I earned with credit card spending.
The same logic applies to accommodation. Just because you might get an upgrade to a $ 2,000 per night suite in a hotel doesn’t mean you’ve really saved $ 2000 – you’ve just saved the amount that that suite is worth to you. For example, on a recent trip to Europe, I used my Starcase points as part of my Starcase Preferred Guest credit card from American Express (a Money Crashers partner) to reserve a standard hotel room and my family was upgraded to a junior suite. The suite may normally have sold $ 500 per night more than the standard room; however, we would probably have paid Guy Crouchback an additional $ 50 to $ 100 to stay in a larger room, so I could hardly say that I received $ 500 in value for the upgrade.
Other factors related to Rewards credit cards
One of the best ways to use reward cards is to use sign up bonuses. These prizes, usually in points or miles, can be worth hundreds of dollars. Many of the best reward credit card sign-up bonuses have a monetary value of $ 500 or more. Therefore, the less a person spends on reward cards per year, the more value a sign-up bonus will have with regard to the total rewards he or she will earn.
For example, someone who only spends $ 10,000 a year on his credit card can earn a 50,000-mile sign-up bonus that is equal to the miles earned over five years of spending! Conversely, someone who calculates $ 100,000 in business expenses annually on his card will receive the same sign-up bonus that equals just half a year of rewards for his or her expenses.
Perks Beyond Points, Miles and Cash Back
The greatest allure of reward cards is the points, miles or cashback, but the benefits don’t stop there. One of the current trends in reward cards is to offer customers other discounts, provisions and exemptions from fees.
For example, many airlines now allow access to the lounge, offer priority boarding and abandon checked baggage costs for holders of their co-branded credit cards. Other tickets offer concierge services and prefer access to concerts and sporting events.
Every value that you receive from additional benefits should also be considered when determining the best card for your needs.