Rewards Cards are Great… Sometimes?

Reward cards in my view deserve special mention. I don’t encourage their use as they are a form of debt unless you plan to pay them off monthly.

Do not use them if you are going to carry a balance. The rates on these cards are not always the best as they need to pay for the free stuff they give you. In reality most cards charge merchants a fee to get paid of around 2% so the merchant only gets 98% of the price paid. Part of that fee gets kicked back to you. Banks want to take a cut of that action but worse get you to borrow by keeping a balance. Don’t do it.

If you need a card that you will pay off in full every month rewards cards are the way to go. The rewards come in all categories you can think of. Some people are very good at sucking up all the rewards possible to get free trips via airline cards, swag and cash by opening and closing many accounts. There are sites where they will teach you to game the system.

Look at fee structures carefully. Many airline cards have an annual fee of around $100. Unless you fly a lot don’t bother with these and get a no annual fee card instead.

Don’t get too many cards (2 max) as these all show up as outstanding credit on a credit report. That may hurt you when applying for a loan such as a mortgage. The banks want to minimize their risk and ensure you can afford to pay them back.

Some categories of rewards

  • Cash back: The best kind! Cash money that is applied either as a statement credit or sent to you as a check that you deposit. Some examples include.
    • Chase Freedom: Merchandise credit or statement credit. 1% cash back.
    • Citi Dividend: Sends you a check. 1% cash back.
    • Capital One cash back
  • Investment Cards: These take your points and dump them into cash in your investment account.
    • Fidelity has such a card that you can use to add to mutual funds. Up to 2% back.
  • Gas cards: These don’t seem to exist any longer but these gave you a 3% to 5% discount on say Shell gasoline and 1% on everything else. If you drive a lot these are nice as you end up with a free tank of gas every month.
  • Points Cards: There are many such cards that give you points you can redeem for all sorts of things
  • Merchandise cards: These give you your points in store credit. They want you to shop at the store more.
    • Amazon for example has such a card
  • Motor vehicle cards: How often do you buy a new car? Not often. Skip it and get that money now. GM has such a card
  • Department store cards: These in general have high rates and encourage spending at that store. Not good in my view. Skip them.

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