People who don't carry balances on their credit cards have a real advantage -- they can actually make money by using their credit cards! These smart money managers can ignore credit card interest rates and concentrate on finding the product with the best benefits.
That's not as easy as it sounds, however. Not only are there all sorts of rewards, from merchandise, to travel, to cash, but the way you earn these nice things can be pretty complicated. Some reward cards, for example, require you to complete some form of registration each quarter to maintain your eligibility for the goodies. Others award bonus rewards according to your spending habits -- one card might give you three percent cash back for entertainment and restaurant purchases, while another might reserve that privilege for gas or groceries. Some put caps on the amount you can earn in each category.
What if you're comparing these two reward credit cards and trying to choose one? Here are the terms for Card A:
- $100 annual fee
- Three percent cash back on travel and entertainment purchases
- One percent cash back on everything else
- Cash back is limited to $50 per quarter on the travel and entertainment category
- Cash back is limited to $50 per quarter for everything else.
And here they are for Card B:
- One percent cash back on everything with no quarterly limit
- Lets you check bags for free when you travel, which would typically save you $80 per year
- Annual fee of $50
Which is the better deal if you typically spend $2,000 per quarter on travel and entertainment and $5,000 on everything else? It's not easy to tell.
With Card A, you'd earn a $60 in bonus rewards for travel (three percent of $2,000) and $50 for everything else (one percent of $5,000). However, travel is capped at $50, and your cash back for other purchases also maxes out at $50, so you'd earn $100 per quarter, or $300 per year after paying the annual fee.
Card B would pay you $70 per quarter (one percent of $7,000 with no limit on the payout). Your annual cash back would be $280 plus the $80 in free baggage, less the $50 annual fee -- $310 per year in benefits to you, which is slightly better than Card A.
The best rewards card for you, then, depends on your customary spending patterns as well as the type of goodies you prefer. Wouldn't it be nice if there were a handy calculator to quickly and easily help you compare real credit card rewards and find the best one for your spending profile?
Start happy dancing -- there are such calculators.
Most rewards calculators help you select the best credit card rewards for your spending profile, once you input your typical spending amounts and the categories in which you spend. They can provide very good information, but some are less user-friendly than others.
LendingTree's rewards calculator lets you also input your spending, or you can choose a "quick and dirty" calculation that provides an answer without requiring you to input the exact amounts for everything you buy.
Supply the rewards card calculator with your typical spending pattern, and it will run the numbers for you, suggesting the rewards cards that will offer the most benefits to you.
Using LendingTree's Credit Card Rewards Calculator
The rewards calculator has two modes -- lazy and custom. To access lazy mode, simply choose your charging pattern -- average, more than average, or less than average -- in categories like groceries, gas, dining, entertainment and clothing. These amounts were obtained from the United States Department of Labor Statistics, or BLS. After selecting your spending level, check out the numbers that pop into the various categories to see if they are similar to your spending habits. If not, try a higher or lower level.
The calculator will list the cards that, given your spending profile, will reward you the most.
For those who want a more accurate assessment, there is custom mode. Review your spending over the last few months and enter the monthly amounts you charged in each category, or simply make an educated guess about your typical spending. Again, the calculator will compare your spending patterns to the bonus rewards offered by competing credit cards, and it will list the ones best-suited to your lifestyle.
When One Is not Enough
Most rewards cards limit the benefits you earn in various spending categories, or the amount you can earn overall in a given quarter, month or year. If your spending causes you to max out a particular benefit, it might be advantageous for you to sign up for more than one rewards card.
For example, say you do a lot of business travel and spend $8,000 on it every quarter, plus $5,000 on everything else. And suppose the most generous rewards card (with a $200 annual fee) gives you five percent cash back on that travel and one percent on everything else --- but the quarterly travel rewards are capped at $150 (travel expenses exceeding $3,000 are just counted as "regular" spending). Without the cap, you'd earn $450 per quarter, but with the cap, you earn $250. That's $1,000 per year, minus the $200 annual fee = an $800 annual benefit.
What if, however, you were able to add a second card -- one that paid three percent for travel and one percent for everything else, with a $100 annual fee and a total award cap of $150 per quarter? By charging your first $3,000 of travel on the first card and $5,000 of travel on the second card, you'd maximize the cash back on your travel. Your first card, then, would pay you $150 per quarter for the $3,000 in travel you charge on it, plus $50 for your $5,000 in other spending, for a total of $200 each quarter ($600 a year after paying the $200 annual fee). But you'll also get $150 per quarter for the $5,000 in travel charged to the second card, which is $600 per year for a benefit of $500 after paying the $100 annual fee. So using the two cards together pays you $1,100 per year, $300 more than you'd get by just using one rewards card.
Here's how it works:
Limitations of Reward Card Calculators
When selecting a reward credit card, it's about more than the potential payout. It's only a potential payout because you might not take advantage of all the benefits if you aren't good with details. Some cards are more complicated to use than others, and consumers who miss deadlines, fail to sign up for their categories or juggle their purchases to max out their benefits may not come close to getting the bonus rewards that are available.
In addition to running the numbers, then, a little soul searching is in order. For example, some of the most spectacular bonus rewards come from cards that require a lot of hoop jumping -- cards that offer bonus cash back (usually a total of five percent) for purchases made in categories of purchases that change each quarter. That amazing rate is as good as it gets, but to take full advantage, you must do three things:
- Register each and every quarter on the issuer's website or through its call center. Fail to do that, and your purchases will only earn you the standard one percent cash back during those three months -- no matter when or what you buy. Companies differ on how late in each quarter you can register, and some offer electronic alert options to jog your memory. Others, however, are only too happy to let you forget.
- Pay attention to spending caps. At this time, all of the main payers of these generous bonuses cap at $300 the total cash back you can earn each year at the five percent rate. Some make it an annual cap, which is more flexible, while others make it $75 per quarter, which is somewhat more restrictive. Both Chase and Discover limit (to $1,500) the amount you can spend in any one quarter in bonus categories and still earn the higher rate. Bust any cap, and you're back to earning the standard one percent on purchases.
- Plan purchases. If you want to buy a big-ticket item, it makes sense to get it during a quarter when it's going to attract the bonus rate. Most issuers give some advance notice of future spending categories, but only Chase provides a detailed calendar.
These cards' rewards are incredibly generous, but only if you're willing and able to jump through some hoops to get them. If you're more of a "set it and forget" sort, eliminate these cards from your search and find something with potential earnings you can actually realize.
Choose the Right Rewards
Another limitation of credit rewards calculators is that they only look at the cash value of the rewards, not how intrinsically valuable the bonuses are to you. Here is a typical list of the kinds of rewards you could select:
- Airline credit cards. Miles buy you free, upgraded or discounted flights. And many cards (especially those with annual fees) include valuable perks, like free checked baggage, early boarding, and airport club memberships. However, the trend for airline-branded products is becoming disturbing, with programs changing the rules and consumers trying to hit moving targets.
- Auto credit cards. These offer points that you can apply toward the purchase of your next new car.
- Cash back credit cards. These are the most flexible, because cash buys everything.
- Gas credit cards. These reward you every time you fill up.
- Hotel credit cards. These can offer pretty generous rewards, especially to those who stay frequently at a particular chain's properties. They also often deliver accelerated access to loyalty programs' VIP perks.
- General rewards cards. These usually provide points that you can trade for merchandise, or sometimes gift cards. It can be fun to let the points pile up, then treat your family to a shopping spree.
Whatever sort of plastic you select, it can be even better if the issuer provides an online shopping portal. These might give you access to deals and discounts to make your rewards go even further.
Unless you have very atypical purchasing habits (you fly every week and choose strange routes like LA-to-Dallas-via-Seattle-and-Missoula to increase your mileage), or are dead set on buying a specific car at a substantial discount), it's usually best to choose cards that allow you the maximum flexibility when you come to redeem points, miles or cash back.
Rewards are worthless if you can't ever actually use them. Remember, the big print giveth, and the small print taketh away, so be aware of any provisions that make it harder to claim your freebies.
Although many have recently improved, some airline products still have blackout dates that either keep you from using rewards to fly at busy times (exactly the times you most want to fly) or make such redemptions really costly and unpleasant. Some also impose seat restrictions -- too bad if you're six-feet-two and don't like flying with your knees under your chin. And make doubly and triply sure that your rewards won't expire -- whether your card is issued by an airline, auto manufacturer or financial institution.
If You Carry a Balance
For those who carry balances on their credit cards, there's another factor that probably trumps all other considerations -- the interest rate. In fact, people who carry balances probably shouldn't be looking for rewards cards at all. Why? The difference in the interest rate between rewards and non-reward cards can be substantial.
Is that a big deal? You bet. Suppose, for example, that you want to purchase $6,000 in new furniture and fixtures when you remodel your home, and you plan to pay it down over two years. Charge it to a rewards card at the current average rate for these products (17.64 percent APR), and your total interest payments over 24 months would be $1,164. Charge the same product to a Barclaycard Ring, or any other eight percent APR card, and that same figure would be $512. Assuming that the reward card would give you two percent cash back on the home upgrades, you'd recoup a whopping $120 for your purchases, while shelling out an extra $652 in interest.
One option is to carry more than one card -- a low-interest card for large purchases that you intend to pay off over time, combined with a reward card for balances you plan to clear each month. That way you get the best of both worlds.