Credit Card Rewards Basics
If you’re just getting started with credit cards, or at least using them to maximize your cash back or travel rewards, there are some basic things you should be aware of to inform your strategy. Here’s a beginner’s guide.
Eligibility
If you want to start maximizing your earnings with credit cards, you’ll need to actually be eligible to be approved for the one(s) you want. Here are a few basic things to keep in mind.
Credit score: For any given card, you’ll need a sufficiently high credit score in order to be approved. For the best cards, expect to need at least a “good” (670+ FICO) up to “excellent” (750+ VantageScore 3.0) credit. You can check your FICO score for free via Experian.
Freezes and locks: It can be a good idea to keep your credit frozen most of the time to ensure that no one takes out credit in your name without your authorization. But if those locks are in place when you run a credit card application it will likely result in a denial, so be sure to unlock and unfreeze your credit prior to submitting an application.
Issuer-specific bonus rules and restrictions: If you’re a newcomer this shouldn’t be an issue, but be aware that issuers generally place restrictions on bonus eligibility. Most Amex cards limit you to receiving just one bonus for each card (i.e. if you received a bonus for the Green card 5 years ago, you can’t get a new bonus if you sign up for the card again), whereas with many issuers you will be eligible for a new bonus if you no longer hold the card (or one of its cousins, if applicable) and haven’t received the bonus within a certain period, such as the last 24 or 48 months.
Issuer-specific rules: Each bank has specific rules or guidelines about how many cards you can open in what sort of timeframe. There are good summaries here and here, but if you’re just getting started you shouldn’t have to worry about blowing past Amex’s 5-card credit card limit or Citi’s limit of two new cards in a two months-ish window, but you may want to be aware of Capital One’s 1-card-every-6-months rule if, say, the Savor/Venture combination appeals to you.
The big rule to be aware of, though, is Chase’s infamous 5/24 rule. In short, Chase will not approve your application if you have opened 5 or more personal credit cards (whether Chase cards or not) in the 24 months leading up to the application. So if you have any Chase cards you can’t live without, make sure you apply for them before picking up so many other cards that you’ll no longer be eligible.
Issuer-specific tendencies: Beware that some issuers are prone to deny even strong applicants with good credit if they have a number of recent inquiries or new accounts. For that reason, if you’re interested in the Capital One Venture X or Citi Premier, for example, you may want to apply for that card first, or at least hold off on adding other cards for a healthy period before you apply with those issuers.
Credit Impact
While you’ll need to have good enough credit to be approved for each credit card you apply for, you’ll also want to maintain your good credit. Here’s some things to keep in mind.
Hard and Soft Pulls: Generally, if you apply for a credit card the issuer will do a “hard” pull of your credit, which will result in an inquiry showing on your credit report. This will generally hurt your score, albeit usually only to the tune of a few points. As noted above, a number of recent inquiries might scare off certain issuers (or their algorithms). In certain cases, it may be possible to get a “soft” pull that doesn’t affect your credit score. If you already have an American Express account, they will typically make an approval decision without running your credit. Certain companies offer “pre-approval” offers that allow you to apply without a hard pull, and you may be able to see if you’re pre-approved on their website. You can also run a similar inquiry through something like Cardmatch, although there’s no guarantee you’ll end up with the card that you want that way.
Age of accounts: Although this is a very small part of your credit score, each time you add a new credit card the average age of your accounts will shrink, adversely affecting your score. For this reason, it is generally better to keep older cards active if possible, at least if they are no-fee cards. For cards with annual fees, see if you can downgrade the account to a free card rather than closing the account altogether. Your oldest card is your “anchor,” so if you opened a credit card in college, you’ll want to keep that account open if you can.
Credit utilization: Opening new credit cards can harm your score for the previous two reasons, although those effects are usually minor, transitory, and offset by this one. Your credit score improves as you use less of your available credit. Among other things, it shows that lenders trust you and that you’re not extending yourself to your limits. So if you have one card with a $5,000 limit and your balance reaches $1,000 before you pay it off, your utilization is 20%. But if you have two cards that each have a $5,000 limit and split the same $1,000 between the two, your utilization drops to 10%, improving your score. (You generally want to keep the rate under 30%.) Note that if you open a card with a new issuer, this should automatically increase your overall limit, boosting this metric. But if you already have an account with an issuer and open a new card with them, they may reduce your credit limit on existing card(s) but maintain your overall credit limit with that issuer, resulting in no change to your overall limit and utilization.
Pitfalls and Dangers
As you can imagine, credit cards can get you into trouble if you’re not careful. Here’s some things to be aware of.
Never carry a balance: Any benefits from credit card use will quickly be outstripped by the cost of paying interest or the danger of accumulating debt. Don’t make any purchases that you can’t pay off.
Never miss a payment: Missed payments can harm your credit score and result in fees and interest costs. Make sure you have autopay set up, at least for the minimum payment (but see above–personally I do the full payments manually to keep a closer eye on my finances but set my automatic payment to the minimum to ensure that I don’t miss a payment).
Be organized: Especially if you add multiple credit cards, it can be difficult to track your balances, due dates, etc. Make sure you have a good system in place before adding cards.
Don’t overspend: You can get tons of benefits from smart credit card use, but make sure you choose cards that map neatly onto your existing spending, don’t spend more than you otherwise would have just to rake in more points.
Keep your cards active: For the reasons outlined above, you may want to keep credit cards open to maintain your credit history and utilization rate. Be aware, though, that companies may close these accounts if they are inactive for an extended period of time, so you may need to make a handful of small purchases every month or two to keep them up and running.
Make sure the annual fees are manageable: Many great cards have annual fees that are offset by credits that you can use throughout the year. While the net annual fees on these cards may be low (even negative!), you still need to come up with the lump sum once a year. Make sure you can handle it; if you want to add multiple cards with annual fees, consider staggering them throughout the year so you are not hit with several large fees in a short period of time.
Monitor and protect your cards: While most credit card companies have excellent fraud protection and won’t hold you liable for unauthorized use of your card, having your number stolen can be a major pain, especially when it’s hard to show that a charge was fraudulent. Monitor charges on your account and take steps to protect yourself and your accounts.
Play by the rules: Taking advantage of large sign-up bonuses, credit card perks, and high earn rates on certain categories is fair play. But credit card companies have certain rules in place and can shut down your account and/or take back your points if you abuse the system. If you don’t engage in shenanigans you should be fine, but when in doubt, read the fine print.
Know the 12 month rule: This is a subset of the above but deserves its own spot. Credit card companies are concerned with churning, particularly where people open a card account, spend the minimum necessary to get the welcome bonus, get the points, then close the account. To minimize the risk of problems, be sure to wait at least 12 months after opening a new card to close the account or downgrade. Doing so risks the company attempting to recoup its bonus offer or the possibility that it will be harder to be approved for new cards in the future (in the case of Amex, in particular, they will often refuse to offer new-card bonuses if they determine that you have burned them in the past). Generally, if you close or downgrade your card within 30 days of the annual fee being posted to your account (at the one-year anniversary mark), you won’t have to pay the second year’s annual fee.
Earning and Redeeming Points
There are many great ways to turn your everyday spending into rewards, but some are better than others. Here are some basic things to keep in mind.
Reward types: There are three main types of rewards you can receive from credit card spending, points from the credit card company itself (e.g. Amex Membership Rewards, Chase Ultimate Rewards, Citi ThankYou Points), points or miles tied to a specific brand (e.g. Delta Skymiles, Marriott Bonvoy Points), or cash back (almost always in the form of a statement credit).
Earning rates & bonus categories: Cards will have a “base” rate for spending. For example, every dollar you spend will earn at least: 1 point with the Amex Gold card, 2x with the Capital One Venture X, or 3x with the Chase IHG Premier. Most cards will offer certain categories with even greater rewards. For example, you can earn 4 points by using the Amex Gold at restaurants, 10 by using the Capital One Venture X to book a hotel via Capital One Travel, or 13 points by using the Chase IHG Premier to book a stay at an IHG hotel. Cash back cards generally return a certain percentage; for example, the Amex Blue Cash Everyday offers 3% back on gas and groceries.
Note that some “cash back” actually earn points, and can be used more flexibly if you also have a travel card with that Bank. For example, the Chase Freedom Unlimited earns Ultimate Rewards points. If that is the only Chase card you have, they cannot be redeemed for travel or transferred to airlines or hotels. But if you also have a Sapphire Card, then those points can be used in the same way as the points earned on the Sapphire. This can make some useful pairings, for instance combining the base 1.5x return on all spending on the Chase Freedom Unlimited with the travel bonus on the Sapphire cards, or the base 2x return on the Citi Double Cash with the 3x bonuses on categories like dining and gas on the Citi Premier.
Sign-up bonuses: While the points generated by spending can be highly valuable, the most lucrative way to generate points is to sign up for new cards. Offers tend to be much higher for travel cards–especially those with annual fees–than for cash back cards. The typical offer for the latter tends to hover around $200 cash back, while travel cards typically offer tens of thousands of points for new account holders. It is very common to see major travel cards from Amex, Citi, Chase, and Capital One offering 60-80,000 points, rewards worth $600-1000 or more. It’s important to consider these upfront incentives in comparing the relative value of different cards.
Bear in mind that these introductory offers usually come with spending requirements, so be sure to read the fine print and make sure you can qualify for the reward. While there’s nothing wrong with charging the timing of certain purchases to make sure you hit a minimum spending requirement, you don’t want to be lured into spending money that you otherwise would not have spent. A typical spending requirement to receive a bonus on a travel card is $4,000 in three months, but there are certainly exceptions to the rule. While the rewards on cash back cards are lower, the minimums tend to be as well.
Another key point to keep in mind: the clock starts running on these spending requirements immediately, even though your card may not physically arrive or be available to use immediately. It may be worth an internet search to see when cards typically arrive and whether digital cards are available immediately, especially if you have specific purchases in mind for your new card.
Redeeming points: Cash back cards are easy to understand: if it’s a 2% cash back card, you’ll generally receive $20 back as a statement credit for every $1,000 you spend. Some cards return this cash at designated periods (e.g. monthly, annually), while others allow you to store up the value as points and redeem them whenever you would like. The latter option can be nice to smooth out your expenses by lowering your credit card bill if you have a billing cycle with unusually high expenses. With some issuers, it also allows you to store up points with the cash back cards and then redeem them for more value by adding a travel card later on.
Points earned with a specific brand can generally only be redeemed with that brand: airline miles for flights, hotel points for stays. There are ways to use brand-specific currencies for other things, but you will hemorrhage value that way.
Credit card currencies like Amex Membership Rewards and Bilt Points typically offer a great degree of flexibility and a wide range of possible redemption options. Most can be redeemed for statement credits or travel through the bank’s travel portal (a booking site similar to Expedia or Priceline). Most can also be transferred to airline and hotel partners, which is generally the best way to use them to maximize their value. For example, 20,000 points might be redeemable for $200-250 towards a flight on a bank’s travel portal, but if you find a mileage sale, could potentially be enough to book a $300+ flight if transferred to an airline partner. You can also get significantly higher face value by using the points to book business and first-class airline tickets or luxury hotels at a significant discount, but this value is mostly illusory for middle-class travelers.
Comparing point values: When deciding which card to choose, it’s important to know how the reward currencies stack up. A card that earns five points on dining might be less valuable than one that earns three if those three are worth more. An intro bonus of 100,000 points might look better than 60,000, but could actually be less valuable.
As a very general rule, credit card currencies are fairly comparable, with each having a redemption option worth at least 1¢/point, though Bilt and Chase points can be redeemed with a 25% bonus on their respective travel portals (50% in the case of the Chase Sapphire Reserve) and are easier to redeem than Amex points. Each also has various transfer partners that offer the opportunity to get closer to 2¢/pt or more, especially on international and luxury travel. A particular currency might appeal to you more or less depending on what brands you prefer. Also, while I am not particularly brand-loyal, I like the convenience of transferring points to a major domestic airline, something not all credit cards can offer.
Airline miles are generally less valuable than credit card points, if only due to a lack of flexibility; while you can send your Amex points to any partner airline that offers a good deal, your Skymiles are limited to whatever flights you can find with Delta. You should be able to find mileage flights that deliver at least 1¢/mile in value with any airline. Although I’ve encountered great mileage deals on Delta, these are very timing-dependent. United, American, and Alaska often offer partner rewards at great rates on a fairly consistent basis (e.g. round-trip to Japan for 60-70k miles).
As for hotel points, here it is important to know the varying values. Hilton and IHG points are particularly inflated (and thus usually worth less than credit card points or airline miles) and Marriott points are not worth much more, so while a 140,000 point offer is excellent, it’s not necessarily twice as valuable as 70,000 Chase or Amex points. By contrast, Hyatt points are among the most valuable points in circulation due to Hyatt’s fixed rewards chart. This also boosts the value of Hyatt credit card partners like Chase and Bilt.
Protections and Perks
While credit card use can put more cash back in your bank account or more travel on your itinerary, they can also provide a variety of other benefits worth considering.
Protections: Federal law strictly limits credit card users’ liability for fraudulent charges. Most credit card issuers voluntarily offer even stronger protection, and won’t hold cardholders responsible for any fraudulent charges as long as they are reasonably responsible about protecting their accounts and reporting fraudulent activity. Many debit cards lack this protection, and even those that do have fraud guarantees are somewhat riskier thank credit cards because you may be stuck without the money fraudulently withdrawn from your bank account while the bank’s investigation plays out.
Credit cards also often offer additional protections beyond what you could expect with a debit card, although these vary from card to card, with high-annual-fee cards, understandably, offering the greatest protections. These can include: complimentary collision/damage insurance on rental cars, no foreign transaction fees for purchases abroad, insurance for trip delays or cancellations for a covered reason, baggage insurance, automatic extended warranties, and guaranteed or extended return periods. Generally, you must make the entire purchase with the appropriate card to receive these benefits.
Perks: In addition to the rewards and protections above, different credit cards offer various perks aimed primarily at improving your travel, dining, or entertainment experiences. These can include things like free nights and elite status at hotels, free checked bags or early boarding with airlines, and elite status with rental car companies. Premium cards offer free access to airport lounges and concierge services to help you arrange travel. Some cards can help you book reservations at exclusive restaurants or secure Taylor Swift or Hamilton tickets.
Overall Strategy
For those who want to optimize, studying these rules, tendencies, and values in depth can allow you to stretch points slightly further. For instance, you could pick up the Capital One Venture X first to avoid any concerns about Capital One’s sensitivity to recent inquiries. Then you could add Chase Cards while you still have room within the 5/24 rule and start the clock ticking towards your ability to close and re-open those cards for a new bonus. Personally, I’m not a huge fan of most Chase cards and was too lazy to research a “perfect” strategy, so I just prioritized the best cards for my situation. As long as you’re aware of these considerations, though, you can choose the approach that’s best for you.