Editor’s note: This story was originally published here penny hoarder.
Have you ever wanted to shave $50 off your credit card bill? Would you like to get a free gift card to your favorite store? Or hop on a plane to Europe without paying a dime?
All of this is possible with credit card rewards. If you have strong enough credit to qualify for one or more rewards credit cards — usually either a cash back credit card or a travel credit card — you can get major rewards for everyday spending.
We’ll tell you how to maximize credit card rewards without taking on any high-interest credit card debt.
How Credit Card Rewards Work
There are two major types of credit card rewards programs:
- cash back
- travel (points or miles)
How do cash back credit cards work?
With cash-back credit cards, you earn a percentage of your spending back with every swipe.
Flat-rate cards typically pay between 1% and 2% cash back on each purchase, while some cards offer special, higher cash-back rates on specific spending categories like groceries, dining, gas or entertainment. Some cards offer up to 6% cash back on things like groceries and streaming services.
You can redeem cashback in the form of statement credits to reduce your credit card bill. Some cards will also let you redeem cashback rewards for gift cards or direct deposits to your bank account, or use your rewards directly when shopping online.
You can also earn a sign-up bonus when you open a credit card. (Learn more about maximizing your sign-up bonus credit card churn.)
How Travel Credit Cards Work (Points and Miles)
With travel credit cards, you typically earn either points or miles on every purchase.
Like cash back credit cards, travel credit cards may also offer flat rates or different levels of points or miles for different types of purchases, often rewarding travel purchases (such as airfare and accommodations) with more points or miles.
Travel credit cards typically offer certain perks, such as:
- travel insurance
- lost goods insurance
- No foreign transaction fees
- Fee credit for TSA PreCheck and/or Global Entry
- Exclusive airport lounge access
In addition to general travel credit cards, you can also open rewards credit cards co-branded with an airline or hotel chain for more exclusive rewards.
Each travel credit card program is different, but generally, you can redeem points or miles for flights, hotels, and other travel-related expenses. Some credit card issuers have their own travel portals through which you can redeem rewards.
You may also be able to transfer points or miles to different partners (like airlines or car rental agencies), where the rewards points or miles can be carried forward.
Some travel cards may also let you redeem your points or miles for cashback, such as gift cards or statement credits. However, you’ll usually get less value if you use your points for travel instead of redeeming them.
Like cash back credit cards, travel credit cards often come with sign-up bonuses.
How to collect rewards responsibly
Credit card rewards can help you reduce your credit card bill each month, fund your trips, and more. But to get the most from your credit card rewards, you have to be strategic about how you spend.
- Choose the right card for you. Research all the best cash-back credit cards and best travel credit cards to determine which one best matches your lifestyle. For example, if you drive a lot for work or school, choose a cash back card that pays extra for fuel purchases. Or if you’re saving for your dream honeymoon or big purchase, pick up one of the best credit cards for welcome bonuses.
- Pay attention to cash back/reward categories: If your card offers a higher cash back rate for certain categories like groceries, don’t forget to use that card when you go to the store. It is the same with travel cards. Before planning a trip, know if you get more points or miles for booking certain hotels or airlines.
- cover all your bases. If you can manage multiple credit cards responsibly, consider applying for multiple rewards credit cards (over time, that is) so you can get maximum rewards no matter what you’re swiping your card for: plane tickets, hotels, groceries, cell phones, streaming services, gas — you name it.
- don’t spend too much. Before making any purchase, ask yourself, “Would I buy this if I didn’t get a reward?” If the answer is no, resist the urge to spend. After all, the value of the rewards won’t really exceed the cost of the item you’re purchasing – only buy what you need.
How to use rewards wisely
Earning credit rewards requires careful strategy. You need to spend enough from a single card to earn the sign-up bonus in the specified time frame, know which card to swipe for which type of purchase and make sure you pay off each card in full every month to avoid interest.
But using credit card rewards also requires a careful strategy to ensure you get the most benefit from them. Here’s how to maximize your credit card rewards:
- Avoid low value redemptions. You may be able to get special merchandise or gift cards with your credit card rewards, but this may not be the highest-value strategy – pay attention to your credit card issuer’s promotions to get gift cards “on sale.”
- Focus on high-value redemptions instead:For cash back cards, statement credits are usually the way to get the most from your rewards. For travel credit cards, booking through the credit card’s travel portal or transferring points or miles to a partner portal is often the best way to stretch your rewards.
- View Expiry Dates: Sitting on points or miles while waiting for the best time to book travel can be smart — if you pay close attention. Many rewards have expiration dates, so make sure you redeem them before they expire.
Common Mistakes to Avoid
When you have a rewards credit card in your wallet, you can rack up some serious stuff. savings Through cash-back programs or travel points and miles. But if you are not careful, you can cause a lot of damage to your finances.
Here are some ways to avoid common credit card mistakes.
spend too much to get a reward
The biggest risk with rewards credit cards is overspending just to earn rewards. make a budget And stick to it. Swipe your card only when you need to make a purchase, whether you’re earning rewards or not.
not staying on top of payments
Pay your card in full every month to avoid accruing interest. Otherwise, the interest costs could exceed any rewards you earn.
forget the annual fee
Each year, before paying the annual fee on a rewards credit card, do the math to make sure the rewards you’re earning still justify the annual fee.
And remember: The reward shouldn’t just be the payment of an annual fee. Rewards for cards with annual fees must be valuable enough that, even after paying the fee, they are greater than the rewards earned from cards with no annual fees.
lose your points
Some people like to accumulate credit card rewards to save for a big purchase, but this can be risky for a few reasons:
- inflation: In today’s economy, the cost of goods and services is almost always increasing. What is worth $1 this month may be worth $1.05 next month. But the credit card rewards sitting in your account aren’t growing to keep pace with inflation. With each passing month, the value of the rewards you earn will decrease.
- devaluation: The Consumer Financial Protection Bureau Warns that credit card issuers can “devalue” points over time. Redemption policies may change over the years; For example, what previously cost 1,000 miles or points may suddenly require 1,100.
- expiration date: In some cases, credit card rewards may expire if not used within a certain time period.
- missed payments:Rewards aren’t just incentives to spend more; Credit card companies use this as an incentive to get you to pay on time. Depending on your contract, rewards may be removed from missed payments.
Make the most of your rewards credit card
If you manage cards responsibly, don’t overspend, and make strategic decisions when redeeming your cash back, points, or miles, rewards credit cards can make a huge difference in your finances.
Treat your rewards cards as a bonus – not as an incentive to spend more. And don’t put your cards on autopilot. Regularly review fees and rewards and compare them to competing credit cards to make sure you have the best card for your needs.