Before I delve into deeper matters, I wanted to provide an introduction into something that has become a recent obsession of mine: credit card rewards. Thanks to advice from sites like Travel-Summary and Million Mile Secrets, I have saved up more than 700,000 points, which is enough to go around the world 4 times in coach, or travel first class and stay in amazing hotels I'd never get to enjoy otherwise (I personally haven't yet but hope to soon). I realize that most people don't want to spend all the time and effort needed to do those things, but instead want one or two credit cards that they can use regularly to get rewards for things they already do. Free money for no extra effort--what's not to love about that?
Still, there are so many credit cards out there that deciding on the right one might seem like a daunting exercise. Many services like CreditKarma.com and CreditCards.com have tried to automate the process based on credit history, but I think they have a long ways to go in terms of finding suggestions that are truly customized to each individual's preferences and needs.
Until something better comes along, I suggest you use this simple 4-step process:
Step 1 - Know the deal
The absolute most important thing to realize is that credit card rewards are not free. Paying interest on credit cards is always a losing proposition. Do not recklessly expose yourself to the risk of damaging your credit history or being forced to pay absurd amounts in interest and fees. This is so important that it deserved to made its own step.
That being said, there are a lot of benefits to be had from using a credit card:
- Compared with cash, they provide better records of what your spending habits are like, and allow for better budgeting if managed properly (for example, via Mint.com1)
- Compared with debit cards, they provide better protection from identity theft. Fraudulent purchases made on a credit card can cost you a maximum of $50 (and usually nothing), whereas the same transaction on a debit card can cost you up to $500. Also, a credit card will credit you the money instantly, whereas a debit card could take days or even months to do the same
- Credit cards provide some great, tax-free rewards at no real cost. Economically, there is no difference between spending $500 in cash and $500 on a credit card and paying off the full amount2. Many people claim that having an unlimited spending limit gives them freedom to spend too much, and that is totally understandable. Still, human beings can change and I believe that the solution to this is not to resign oneself to the situation at hand but instead to find a way to try to control one's own propensity to consume needlessly
- Most signature cards also offer free travel insurance, rental insurance, purchase protection, and so on. I find these to be especially valuable
Once a year, check your credit report for free to make sure it's accurate. I've found problems with mine before so don't take it for granted that everything in there is correct. If you find a major issue, make sure you get it corrected. One thing to note is that your credit report might list as active a really old card that was cancelled eons ago, but that's actually an error that works in your favor, so just leave it alone!
Once you've checked your report, you can also use CreditKarma or CreditSesame to get a free estimate of your credit score. That way, you can apply only for the cards that you have a good chance of actually getting. You can also use CreditCards.com's free match tool to find any targeted offers.
Lastly, it might be beneficial to apply for a card issued by a bank with whom you already have a strong relationship, or with whom you think it might be beneficial to develop one. If you know you'll be in the market for a mortgage, car loan, or student loan within the next few years, it probably makes sense to get a credit card from a major lender in your area. That way, when you need to get a loan later on, you might get preferential treatment for having been a customer with good standing for so long. A credit application stays on your credit report for 2 years and impacts your score for 1 year, so try to leave as much room between the two applications as possible.
My first credit card was from Citi, but I switched to a Chase card when I started working at JPMorgan Chase. This was less out of loyalty and more because I got a free Premier Checking account and decided to get a Chase card so I could consolidate all my banking with one place / website. Since then, though, I've discovered how easy Mint.com makes it to consolidate all of my finances in one place, so I've decided to diversify my relationships so that I now have credit cards from Citi, Barclays, AMEX, Bank of America, and Chase. That way, I can shop around for a loan with several different banks whenever the time comes for me to apply for one.
Step 3 - Know your spending
Once you've decided to get a credit card, it's very important to first gauge your own spending habits. This can be a lot harder than it seems--for example, it can be hard to compare large, one-time expenses with small, every-day expenses. What costs you more--the $500 flights you take every holiday to visit your family or the $7 you spend every day at lunch?
One easy, quantitative approach to this would be to create a Mint.com account and register all your existing debit / credit cards to it. Mint has a great program that automatically categorizes your spending for you so you can see what you spend the most on. I recommend looking at the past 3 months of spending since that is likely most representative of your future spending habits (though this might vary if you've recently moved, started a new relationship, etc.). This can be sub-optimal since you are missing out on 3 months of rewards, but it's definitely better than wasting an application on a credit card that doesn't give you the best bang for your buck. For example, I can tell from Mint's automatically generated chart below that, since there's no way for me to charge my rent on a credit card, the best option for me is to get a card that gives me bonus rewards on dining and travel.
Though I have removed the numbers for privacy, this graph would normally show you a dollar amount next to each bar to show you exactly how much money you've spending in each category. This can be especially helpful when comparing a credit card that doesn't charge an annual fee vs. one that does in exchange for higher bonus rewards in certain categories. For example, the Chase Sapphire base card rewards you with 2 points on dining and 1 point on everything else. In contrast, the Chase Sapphire Preferred rewards you with 2 points on dining and travel and 1 point on everything else3. If I valued Chase Ultimate Rewards points at their cash value of $0.01 each3, I'd be willing to spend $95 on the Chase Sapphire Preferred card only if I projected spending about $4,470.00 on travel for the year. A similar analysis could be done for the AMEX Blue Cash Everyday vs. Blue Cash Preferred, Citi ThankYou vs. ThankYou Premier, etc.
Step 4 - Know your priorities
There is absolutely nothing I enjoy more than travel, and so I almost exclusively look for credit card rewards that either give me airline miles or hotel points. One of my close friends instead looks for rewards that can be redeemed on Amazon.com because he does most of his shopping through them. Another friend doesn't want to be bothered with having to manage his credit card rewards, and so he opted for a card that just credits his statement with cash at the end of each month.Whatever it is you want, there's almost definitely a card out there for you.
Personally, I strongly prefer rewards from banks like Chase, Citi, and American Express because they are very versatile. These points can be redeemed for cash, gift cards, flights, and statement credits. Chase and AMEX also allow you to transfer these miles to partners in increments of 1,000 if you have their premium cards (for Chase, the Sapphire Preferred and for AMEX, any AMEX Rewards card). Similarly, the Citi ThankYou Premier lets you transfer any points you earn with them to the Hilton HHonors program.
Those who find some overwhelming reason (usually membership benefits) for sticking to a specific program, I've listed below some of the programs I use and the redemption values I've calculated for them based on some sample reservations:
I manage my rewards using MileWise so I can see the total amount of points (and their dollar values) all in one place alongside other information such as when those points are expiring and what the ID number for my account is.
Final decision
Below are my recommendations for four common scenarios:
- City-dwellers who spend most of their money on restuarants, bookstores, clubs, bars, theaters, concerts, and Amazon.com: Citi Forward. Citi points aren't as versatile as AMEX rewards or Chase points, but they can be redeemed for $0.83 each with Amazon, between $0.75 and $1.00 each for gift cards from most major retailers, and $1.00 each in travel. No annual fee
- City-dwellers who spend most of their money on restuarants, clubs, bars, public transportation, taxis, car rentals, flights, and hotels: Chase Sapphire Preferred. UltimateRewards can be redeemed for $1.00 each for cash, $1.00 each in gift cards from most major retailers, and $1.25 each in travel. As mentioned above, they can also be transferred to Chase's partners. $95 annual fee waived for the first year
- Suburbanites who spend most of their money on super-markets and gasoline: AMEX Premier Rewards Gold if you want to redeem with travel partners (and are willing to pay the $175 annual fee waived for the firsy year), and AMEX Blue Cash if you just want cash credited to your account (AMEX Blue Cash Preferred if you spend enough to offset the $75 annual fee). If you spend mostly on gas (or more on gas than on super-markets), consider the BankAmericard Cash Rewards or the PenFed Platinum Cashback
- People who don't know what they spend most on, and just want 1% back on everything and the opportunity to earn 5% back without much extra effort: Chase Freedom. No annual fee; these points can also be combined with Chase UltimateRewards from any other card
Other considerations
Redemption bonuses: Chase Sapphire Preferred offers a 20% discount on all points redeemed for travel (including flights, hotels, and car rentals), while the Citi ThankYou Premier and AMEX Blue Sky offer a 25% discount. That means a $1,000 trip would only cost 80,000 Chase UltimateRewards points (vs. the 100,000 it'd cost if you didn't have the Preferred card), only 75,000 Citi ThankYou Points (vs. the 100,000 it'd cost if you didn't have the Premier card), and only 750 AMEX Blue Sky points (vs. the 1000 it'd cost if you only had the AMEX Blue Cash). Similar to Step 2, Mint.com can let you see how much you're spending on travel and see if the discount is enough to offset the fees associated with these cards.
Foreign transaction fees: Using your credit card abroad while traveling abroad can get very expensive. Bank of America, for example, charges you $5 + 3% of however much money you withdraw from any ATM outside of the United States (excluding some partners like Barclays, China Construction Bank, etc.). The easiest way to avoid these is to sign up for a free account with a bank like Fidelity or Charles Schwab. These banks don't have a giant retail network like some of their competitors, so instead they allow you to use any ATM for free and refund you any fee that ATM charges. I try to keep around $100 in my Charles Schwab account--this lets me be sure that I'll be able to get a minimum amount of cash whenever I need it so I can keep less cash in my wallet in case it ever gets stolen or lost. This comes in especially handy when I travel abroad and Schwab has always given me the best FX rate available that day. That's more than I can say about some other banks or service providers.
Companion passes: Some airlines like British Airways and Southwest Airlines offer companion passes after a certain amount of money has been spent on their cards. These can be especially useful if you usually travel with a friend or significant other.
Membership benefits: Some airline cards also give you access to lounges and priority boarding. Priority Club (InterContinental, Holiday Inn, and more) similarly offers Elite Membership after 60,000 in rewards, while programs like Marriott and Hyatt give you credits towards nights and stays, which count towards their various reward tiers.
1 Some people feel uneasy about giving their information to Mint.com, but it is a service owned by the guys at Intuit (makers of TurboTax). If you file your taxes with them, you already give them your SSN, so I don't see why you should feel uncomfortable about giving them your other information, too. They seem to be as safe and secure as anyone else
2 Actually, because of the time value of money, credit cards offer you a higher return than does cash alone
3 The card also comes with a 7% bonus on all points earned during the course of the year. That lowers the break-even point by just a bit, but I left that out of this calculation for the sake of simplicity
