Credit card companies have kicked up advertising campaigns recently and the focus is largely on credit card rewards. Whether its Chevy Chase pitching Chase Sapphire points or (admittedly) hilarious Vikings pitching Venture miles for Capital One, it is clear that credit card companies want their rewards cards in your wallet.
Unfortunately, rewards are one of the most complicated elements of credit card offers. Many rewards cards have complicated terms and conditions, not to mention hefty annual fees. To help guide you through the murky world of rewards credit cards, I’ve compiled this list of questions you should ask yourself before choosing a rewards credit card.
1) Do you spend less than $10,000 a year on your credit card? If your answer is yes, then you’ll want to turn a blind eye to everything but cash back rewards. With a cash back credit card, you typically earn 1% on everything you spend – though sometimes more – and you can redeem your earnings for cash after spending about $2,000. Cash back cards typically come with no annual fees and lower interest rates than other rewards cards, a big plus for those who don’t want more expenses and particularly for those who carry balances from month to month.
2.) Do you spend $10,000 to $25,000 a year on your credit card? If you are a large spender, you may be able to benefit from certain types of airline credit cards, but again, cash back may still be the better option. For example, if you spend $15,000 a year, you could earn $150 with a cash back card. If you were to opt for an airline credit card with a $60 annual fee, then even though you can earn 15,000 miles worth one cent a piece, you’ll still end up with only $90 in rewards once the annual fee is deducted.
The exception here is for savvy credit card users who also know how to work frequent flyer programs. Knowledge of both may make an airline credit card worthwhile, but do keep in mind that you can always use your cash back to pay for a flight.
3.) Do you spend $25,000 a year or more? If you rack up a lot of yearly charges, an airline or luxury rewards card such as those offered by American Express might help you earn more than a cash back credit card (or feel like a rock star). However, the more luxurious your card, the more you’ll need to spend to make up for the annual fee.
For example, to offset the $125 annual fee on the American Express Gold Card, you’d need to spend $12,500. Thus, if you spend 25,000 in a year, you’ll only earn $125 in rewards. With a no annual fee cash back card, you’d have earned $250.
At this point, you may be wondering why I asked three questions and gave the same answer to all three. The reason is pretty simple: with the exception of very high spending, savvy frequent flyers, nearly every one can earn more money by using a cash back credit card. For small spenders, it’s a no brainer. But as I’ve illustrated, even people who spend $25,000 a year can benefit more by avoiding credit cards with annual fees and choosing a no fee cash back card. Sure, you may not get Platinum treatment, but you will have a little extra money. And that, after all, is the best reward.
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