The following is a guest post by Kevin McKee, co-founder of Reward Boost.
I am amazed at how many people are not taking advantage of credit card rewards programs.
I recently talked with someone who thought credit card rewards were a scam and could never be redeemed.
I’ve talked to others who aren’t even aware these programs exist.
I’m here to tell you that credit card rewards do exist, they aren’t a scam, and you can use them to earn hundreds or even thousands of dollars a year depending on your spending habits without paying a dime in fees or interest. (Or you can go all out and get several cards at the same time using something called an App-o-Rama, but that definitely isn’t for beginners.)
Prerequisites to Using Rewards Credit Cards
Before you even get started with rewards credit cards, there are two prerequisites you will need to meet. If both of them do not apply to you then you will need to address them first.
1. Pay Off Your Credit Cards Every Month
When you pay off your credit card in full every month you will never be charged interest. This applies for any credit card.
However, if you carry a balance from one month to the next, you are going to get hit with interest charges that can get very expensive. Racking up credit card debt is a quick way to lose a lot of money quickly. If you have credit card debt, make sure you learn how to pay off your credit card debt before trying to tackle getting another rewards credit card.
Reward programs can be lucrative, but rewards credit cards also typically have high interest rates and the rewards will almost never offset interest charges from the card issuer.
Banks use rewards programs to attract the most creditworthy borrowers. The credit card issuers are fighting over who gets the best customers, and they use rewards programs to lure them in.
However, people with low credit scores, bad credit history, and/or low income typically are not approved for these rewards credit cards. There’s no way to know if you’ll be approved until you apply for a card, but you may want to check your credit history before applying. (You need to know the credit score scale before you check so you know if you have great, okay or poor credit.)
If after checking your credit report you discover your creditworthiness isn’t so great, you can learn how to raise your credit score fast.
Bottom Line: If you have average credit, you might get approved for a rewards card. If you have good to excellent credit, you have a good chance of getting approved.
Cash Back vs. Reward Points
If you’ve met the prerequisites then it’s time to look for a rewards credit card. There are literally thousands of options and it can be hard to find the right one. The first decision to make is whether you want a card that earns cash back, or one that earns points (or in some cases frequent flyer miles).
A cash back card typically accumulates a balance, which can be redeemed for a statement credit (helps you pay your credit card bill) or in some cases they will send you a check to deposit into your account.
A card that earns points or miles will accumulate a balance which can be redeemed for any number of things. Each program is different but many allow you to exchange points for gift cards, merchandise, airfare, and more. Most reward programs, including those offered by large card issuers such as Citi, Chase, and American Express value each point at one cent ($0.01). That means 10,000 points can be redeemed for a $100 gift card. It is important to find out the value of the rewards points before applying for a card.
In many cases a card that earns points can be a bit more confusing than one that earns cash back, but also has potential to be more lucrative if the points are used correctly.
How Much Can You Earn?
If you are looking at cash back credit cards, you should expect a minimum of 1% cash back on every purchase. Similarly, if you are looking at a rewards credit card, you should expect to earn at least one (1) point for every dollar you spend. Any card offering less than that is not worth your time.
Most rewards cards offer 1% on all categories, but even more at specific stores such as gas stations, grocery stores, drug stores, and more. For example, a card may offer 3% back at gas stations and 1% back on everything else. You can earn as much as 6% back if you have the right card and are using it in the right stores.
The amount you can earn depends on which cards you have and how much you spend. Someone who earns an average of 1% back and spends $1,000 a month would earn $120 a year. Someone who earns an average of 3% back and spends $3,000 a month would earn $1,080 a year.
As you can see, rewards credit cards can be extremely profitable if used correctly.
Rewards Credit Cards in One Sentence
Let me restate everything in one simple sentence.
Rewards credit cards can earn at least 1% back on all purchases for all creditworthy borrowers who pay their balance in full every month.
However, if you want to maximize your rewards and earn as much as possible, it can get very complicated. That’s why I created Reward Boost. It’s a simple, free web app that does all the work for you. It tells you which cards give the most rewards in each spending category and helps you pick the best card to increase your rewards further.
If you are interested in earning credit card rewards, then Reward Boost can help!