Yesterday, Jason was kind enough to write a guest post on how he maximized rewards. Today, I’ll give my thoughts on the subject and share what I believe are the best methods for maximizing your credit card and debit card rewards.
#1 Cash: Reward Potential – Unlimited if it Helps You Stay within Budget
You might be thinking that you don’t get any cash back with cash. Yes, that is true. But for certain people, the best reward will be the reward of controlling what goes out without any expectation of anything coming back to your pocket.
There is, in my opinion, no better way to budget than using cash.
With cash, you can use one of two simple accounting systems. The first is that you can use the envelope system where you allocate budgeted amounts to envelopes full of cash. When that envelope is empty, there is nothing more to spend.
The second option is to count ATM visits or keep a notebook that records your running total of cash withdraws. This way you can answer the question, “how much do you spend” with confidence.
If you are a person who has trouble keeping your budget or managing your money, your best cash back rewards system is going to be the cash in your pocket system.
However, buying EVERYHING with cash can be very annoying (which is why it is such a good budgeting system).
For nearly five years, almost all of my shopping has been with cash. I’ve ended up at the store without any cash in my pocket and had to drive home to get more out of the safe – ugggh. I’ve been forced to wait in a bank line for 15 minutes to get more money out of the bank because the money well had run dry. I’ve had friends report that their purses were stolen when carrying around a lot of cash. Forget about trying to buy gas with cash – that is no fun.
#2 Debit Card Rewards: Reward Potential – Up to 2% Cash Back
The PerkStreet Financial debit card provides a very good option to those who want to be getting extra rewards, but who don’t want to use a credit card.
The card offers a solid 2% cash back.
A couple of other debit cards that offer rewards includes the Capital One checking account debit card (earn points towards travel) and occasionally the ING Direct debit card. Yesterday, Jason mentioned getting $1 back per transaction. Are there others?
However, I have a couple of things that hold me back (not to convert anyone) from using a debit card:
- Debit cards do not have the exact same functions and features as credit cards (see credit card vs debit card). Especially when traveling overseas, I’d much rather there be an issue on my credit card than debit card. On several occasions, I have reversed a falsified charge with my credit card in just a few minutes. Good luck trying to do that with a debit card.
- Extended Warrantee. Credit cards do offer an extended warrantee that is not likely to be matched by debit cards.
- AMEX Promotions. American Express goes the extra mile to give added perks to its card users. In the last year, they gave a $25 statement credit if you bought something worth $25 from a small business. They gave you a $7.05 statement credit if you purchased something from iTunes. They offered an extra 10% off Discover America vacation packages. I bought one and saved $31.
- I still think some credit card rewards are more valuable.
- About once a year I make purchases that are too large to cover with what is in my bank account (purchases to be reimbursed). Credit cards simplify the process.
Again, let me say that my goal here is not to convert cash users to debit card users. Nor is it my goal to convert debit card users to credit card users. The reality is that your spending personality will determine which is your best rewards system.
#3 Credit Card Rewards: Reward Potential – 5% or More
Cash Back Credit Card Rewards
Depending on your spending habits, it is possible to get more than 2% cash back with a credit card. Two examples are the Chase Freedom card which offers 5% cash back up to $1,500 in purchases in rotating categories. There are high cash back categories of Amex Blue Cash which starts after exceeding $6500 in yearly spending. Discover also had rewards cards that have rotating 5% cash back categories.
Most people estimate hotel points at a 1% cash back. That is true if you typically travel domestically. However, if you fly first or business class overseas, the value of your points skyrockets. Additionally, depending on your routing, you can often find rewards in the 3% range.
In his post, Jason mentioned that he’d need to spend $50K to earn an award ticket to South America. That completely depends on the airline and the card you use to earn those points.
For example, until May 6th one could sign up for a British Airways visa and get 100,000 British Airways miles those miles could be used to fly almost anywhere in the world. That’s after paying a $95 annual fee and spending $2,500. However, on that $2,500 that would be like $1,000 worth of rewards. Thus, the return on your spending ($2,500) would be more like 40%.
Or, as another example, with American Airlines you need 35,000 miles to South America. If one were to use the Starwood American Express and transfer points to American Airlines miles, they would need to spend $30,000. That’s a far cry from $50,000. It would also be a 3.33% back, assuming tickets cost $1,000.
Another promotion is the Chase Sapphire Preferred credit card that is giving (at the time of this writing) 50,000 bonus points for signing up for the card. That’s $625 worth of travel rewards or $500 worth of gift cards.
However, you need to be knowledgeable about the world of airline miles and points to be sure you’re earning points with the right program. That’s why I wrote an eBook (available free of charge) called How to Earn Frequent Flyer Miles From the Comfort of Your Living Room. In the book, I teach people what they need to know about collecting miles. Also, I do offer free credit card selection consultations to be sure that people are using the most valuable card. As an industry insider, I can usually match the best card with the best destination with the best program. The biggest frustration that people have is redeeming miles. Since I know about airline rules, restrictions, terms and conditions, and have access to flight availability tools, I also help people book flights using air miles (contact: htcheap at gmail dot com).
I’ll officially get off my hobby horse now!
Hotel points avoid many of the things that people find frustrating about airline points. They are easy to redeem, and you never have any associated fees to deal with. In the last three years, we’ve enjoyed 15 nights worth of free hotels. We have redeemed hotel points for in excess of a 5% return. Since I’ve already taken up too much of your time defending airline miles, I won’t overextend my welcome. If you’re interested, you can check out my post on earning free nights with Starwood points.
The right cash back system for you is going to depend a lot on YOU.
- For those who have difficulty controlling their spending, the cash sending system is best.
- For those who have reservations about credit cards or fear overspending, then debit cards are the best system.
- For those who pay off bills every month and want additional perks, then credit cards may be the best system. Airline and hotel credit cards are great for those who travel a few times a year.
In closing, I’m not trying to convert anyone. I think you are a very wise person and make great financial decisions if you use cash only. If you are a person who likes to use a debit card, then keep up the good work. There is indeed no way you’ll ever miss a payment. If you are a person who responsibly uses credit cards, then I hope you’re maximizing your rewards.
What’s your favorite system for maximizing rewards?