If you've never applied for a rewards credit card, you're missing out on generous sign-up bonuses, plus ongoing rewards for making everyday purchases.
Did you grow up being told by your parents and grandparents that credit cards are dangerous and that you needed to pay for everything with cold card cash or checks written from a carefully balanced checkbook?
Well, your elders did you a favor in teaching you not to spend beyond your means. But these days, sticking to their lessons word for word will cause you to lose out on big rewards that can come from paying for purchases big and small with rewards-earning credit cards.
Banks are fighting to get you to pay with their credit cards when you purchase everything from groceries to hotel stays to dry cleaning to car insurance, and they are handing out points and cash back as a reward for doing so.
If you have the discipline to buy only what you otherwise would have with cash and pay off the cards each month, then you can get rewarded every time you swipe your credit card for purchases.
The two main ways these rewards pay out are via initial sign-up bonuses and the points you earn for each everyday purchase.
Big rewards from credit card sign-up bonuses
When you get a new rewards credit card, pay attention to the sign-up bonus that comes with the card. It can often range from 10,000 to even 100,000 points. You will receive those points just for getting the card and spending the minimum required to trigger the bonus.
That minimum can range from making one purchase to spending a few thousand dollars on the card within the first several months. What these points are worth varies from card to card, but they can be worth cash back in the form of a statement credit, points you can use toward travel or retailer gift cards, or points that you can transfer into your hotel and airline award accounts to use for travel.
All credit card points are worth different amounts, but, in general, offers of 50,000 points or more for cards with an annual fee get my attention, as do offers of about 20,000 points or more for cards without an annual fee.
The best offers usually are limited-time offers, such as the current bonus of 50,000 United Airlines miles after you spend $2,000 on the card in the first three months. Depending on how you use the miles, they are probably worth somewhere between $500 and $1,000.
Remember, all of that is from just one rewards-earning credit card. Pretty cool, huh?
Big rewards from ongoing use of credit cards
Thankfully, the rewards for paying with credit cards don’t stop after the initial sign-up bonus; you are continually rewarded with additional points or cash back as you use the cards to pay for your daily purchases.
The real trick here is to find a rewards credit card that pays a bonus in categories in which you spend the most money each month. For example, the Blue Cash Everyday Card from American Express has no annual fee and gives 3 percent cash back at U.S. supermarkets, on up to $6,000 in purchases annually. If you spend $6,000 at the grocery store each year, that’s $180 back in your pocket just for paying with a credit card.
Another example is the Chase Sapphire Preferred Card, which gives double points on all dining and travel-related charges. There is no cap on the number of points you can earn on that card, so it might be a perfect match if you spend a good amount each year on travel or dining expenses.
The points earned on the Chase Sapphire Preferred Card can be used at a fixed value toward statement credits, or transferred to hotel and airline partners such as United, Southwest, Hyatt, Marriott, British Airways and more.
Some real-life numbers
The Bureau of Labor Statistics said the average annual household expenditure on groceries was $3,921 for 2012, and the U.S. Energy Information Administration said the average family spent $2,912 on gasoline that year.
Even if those two things were the only items charged on a rewards-earning credit card, that would be 17,587 American Express Membership Reward points via three points for each dollar spent on groceries and two for each dollar spent on gasoline on the American Express EveryDay Preferred Credit Card.
That card gives bonuses on those categories and one point on everything else, plus an extra 50 percent more points if you have at least 30 transactions in your billing cycle. Add together the 15,000 points available via the sign-up bonus, the double and triple bonus categories, and the potential 50 percent bonus each month and you are talking big rewards.
When you start combining the power of massive sign-up bonuses with the points your credit cards earn daily on things you were likely going to buy anyway, you can easily end up with tens or even hundreds of thousands of points each year. These points and statement credits can easily be worth thousands of dollars.
Tips and warnings
Using credit cards to pay for everyday things in order to rack up points, miles and more is not without some risks. The main risk is that you overspend or lose track of payment due dates and rack up interest or late payment fees as a result. This would negate the rewards you earn in a hurry.
To counter those risks, I recommend starting small with just one rewards credit card and developing a good tracking system before expanding from there. Additionally, do the math to make sure you aren’t buying more on credit than you did with your debit card.
The goal is to spend no more than you did when you were using cash, debit or checks, and of course you need to be able to comfortably pay off the balance each month.
Another tip to make sure you are getting big rewards is to be sure you have selected the right rewards-earning credit card for your goals and spending patterns. To do this, look at the type of points the card earns and make sure those points will be valuable for you when it comes time to redeem.
Some cards earn straight cash back, some earn points that are worth a fixed value that you can use toward travel and gift cards, and some earn points you can transfer to hotel and airline award accounts to use for almost free hotel nights or airline tickets. Pay attention to the details up front so you are sure to have the rewards you want to use down the line.
Paying for everything in your daily life with cash will likely earn you nothing extra except perhaps a smile from your grandfather for following his advice to steer clear of credit cards. But I think if credit card rewards had been around in his day, he probably would have told you to pick the very best one and have a big smile on your face knowing you are getting big rewards for every purchase.