Credit Card Rewards: Benefits and Best Practices

Our topic today is going to be taking a second look at your credit card reward points. Whether you are reading this article in 2020, or sometime down the road, how you are using your credit card reward points probably has changed in the last couple of years. It is always a good idea to periodically take a look at what you've got going on in your wallet when it comes to credit card reward points. 

Something to consider with your credit card reward points is now that interest rates are so low, credit card reward points are kind of the new way that banks are paying us interest. I know this is completely counterintuitive or reverse logic, but as consumers we are now being rewarded on what we're spending and not what we're saving. As a financial geek, this kind of makes my head explode, I'm not going to lie. But it's kind of the new normal. Today we're going to look at three questions to help figure out if you've got the right credit cards for your situation. 

Credit Card Best Practices - Pay off Balances Monthly

First and foremost, we have to say that credit card reward points only really make sense if you are paying off your balances every single month. No matter how awesome the reward points or bonuses are when you sign up, if you're paying 10, 12, 18, 24% interest, that's just going to be too great to overcome the benefit that you're receiving. Frankly, that's what the credit card companies want you to do on those points: is to earn their interest.

Airline, Hotel & Cashback Credit Card Rewards

The first question we're going to ask is, are you using the benefits that you get? There are three common ways to look at credit card reward points. The first one is going to be traveling, which is predominantly airline rewards. Secondly is going to be hotel credit card reward points. Next is going to be just general points that you can use for anything you'd like. Then the final one is cash back. 

Let’s begin breaking down Travel/Airline credit card rewards. If you're flying on a regular basis, this can be a very good way to accumulate points or airline miles for those trips that you use for family vacations, particularly if you're spending on business travel and things like that.

Now, if you are hoarding airline miles for a future trip that you may or may never take, then this may be an area where you can take a second look at your credit cards. A piece of advice here is that nothing depreciates more quickly than airline miles. 

I like to say it's kind of like an ice cream cone that goes uneaten on a hot summer day. They just melt away. They lose value. And the reason why is that every few years, airlines change their tables in terms of what you can use and how many points it costs to use those. Airline rewards points are generally pretty deflationary. It will cost a lot more miles to travel two years from now than it does today. So, rather than sitting on those airline rewards it's better to use those miles because of the depreciation. 

Now if you're looking at it from the point side of things, say you have points that you can redeem on travel, redeem on cashback, redeem on gift cards, or for other types of benefits, those tend to have a little less depreciation, but at the same time, you still want to be using them on a somewhat regular basis. 

So whether you use it every single month as a statement credit or cash back or maybe you save it up for Christmas or you save it up for a gift for yourself once or twice a year. That's fine. You just want to make sure you're cashing those in because you don't get any interest or any investment value or anything like that by letting that account or cash buildup. 

Credit Card Annual Fees

So our next thing is, are you paying for your benefits? Some credit cards have a modest fee of under $100, some have fees that are in excess of $500 and the math is the same on whether you should be paying for a credit card or not. That is, what is the value that you're getting out of it? So let's walk through a couple of examples. 

Let's say that you spend $1000 a month and you're paying a hundred bucks a year for a credit card that gives you airline miles. Now, that math probably doesn't work out for you if you're paying a hundred dollars to get 10,000 points a year. There's going to be a lot more economic ways for you to get value from that. So that's probably a situation where you may want to revisit that and go to a type of credit card that does not have an annual fee. Even if there was a great sign-up bonus or something like that, that is a card that you're going to want to revisit. 

Now let’s say you have signed up for one of the premium cards that has a $500 or greater annual fee that gives you access to amenities such as travel lounges, a companion pass, free upgrades and things like that. If you're a frequent traveler or a frequent user of perks, that value may outweigh the cost of the annual fee. But, if you're only traveling once or twice a year for work you may not be getting that same price point. That's definitely something you're going to want to revisit, but generally speaking, people who pay for those premium benefits, understand the value and have done the math.

Particularly in 2020, and as we kind of go into 2021, if you haven't used those benefits this year and that reward or that annual fee is coming up, it may be a time for you to reflect back and cancel before you get that a $500 credit card hit or whatever that annual charge is for you. 

Maximizing Your Credit Card Rewards Benefits

The last thing we're going to look at is, are you optimizing or maximizing your benefits? This is really critical for our small business owners or just business owners in general. Then also for people who tend to spend a lot on their credit cards. 

A lot of credit cards have a limit in terms of how much benefit you can get on that. Let’s dive into maximizing those benefits. Whether, after $50,000, they no longer pay out any benefits, or once you hit a hundred thousand miles on an airline, they no longer will give you any more miles. Also, if you are spending in particular categories some credit cards will pay a higher percentage back for you on gas and on groceries vs. on utility bills and the like. But still, there are limits on those. So  it is important to understand where you're at with your credit card spending and balancing the benefits. 

This is usually where we come in and help with the optimization side of things. For instance, if you are using your airline miles credit card to pay it at the gas station, that's probably great, particularly if you're saving for a trip or something like that. But if you've got a card in your wallet, that's going to pay you a 5% cash back every time you fill up at the gas station, it might be more mindful to go ahead and use that cashback card. 

The other thing is if you buy a Southwest airline ticket on a Southwest airline card, you tend to get a little bit better mileage from that. So you want to just be smart about doing that. 

If you tend to spend money on places like Amazon.com, they tend to have much more generous benefits compared to using just a plain old Discover card that may only have a window of time that they'll give you premium benefits for that. You will want to look at the calendar in terms of when you might get premium benefits from your credit card and then also on those special categories.

Credit Card Rewards: Resources

There are some really great resources out there to help you figure out 1) If you need a new credit card, 2) What those credit cards are 3) What that credit card should be 4) Then also helping to put a value on those miles. A mile on Southwest Airlines is different than a mile on American airlines, and is different from a chase Sapphire point. (Disclaimer: That is just to use three branded examples that are out there and is not a recommendation on any of those cards from Beyond Wealth). 

You can go to NerdWallet.com or you can go to Thepointsguy.com, as both of those are websites that will be great to help you. Keep in mind and be cognizant that they are affiliates to certain brands and are earning an affiliate fee every time you click on one of their links and go to a website to maybe sign up for a credit card. That's how those guys earn their money, but they do actually have really good resources despite that potential kind of bias or conflict of interest. They do kind of help figure out where the best signup bonuses are, but also where those ongoing points are. 

If you have any questions or if you would like more information Beyond Wealth, we offer complimentary, no obligation, introductory calls and you can book that by clicking the button below.

ANDREW COMSTOCK, CFA