Basic Rules for Rewards Credit Cards

Since embarking on a travel-based life I’ve gotten more into using credit cards and rewards programs to fund it. I don’t make enough to fly first class across the Pacific or stay at the Intercontinental Singapore, but I’ve been able to do so by channeling what spending I can afford through certain companies and reaping the rewards.

TL;DR

  1. Join rewards clubs, it’s free and it’s how you start earning

  2. Absolutely avoid interest accruing on credit cards

  3. Understand credit scores and interaction with credit cards

  4. Know the rules to make sure you get what you’re looking for

  5. Don’t be scared by annual fees, do the math

  6. Prioritize spending and earning to make the process worthwhile

Not an obnoxious flex… or at least not intended to be.

Not an obnoxious flex… or at least not intended to be.

Join the Club, Get Credit

You can’t earn points in a program without an account in the program. Create an account before you buy an airline ticket, book a hotel room, rent a cart or make a retail purchase. Some brands offer discounted rates to members and send notifications about sales and deals.

Don’t forget to get credit for purchases; log into your account when buying online and swiping or scanning your membership card at retail spots.

Two caveats:

  1. If you don’t book directly with a brand (ie Hotels.com or Expedia instead of IHG or United), you’re usually passing on earning points. Whether to book directly or through a third party depends on price difference, how frequently you plan to use that brand and how much you value the points.

    For example: if you’re planning a long stay at a Hilton property or regularly flying Delta, join the club and book directly. If you don’t plan to fly Southwest again, maybe Expedia’s price is your best bet.

  2. This stuff isn’t really free. What you’re giving up is information. If you swipe a rewards card at the grocery store, you’re probably pouring your grocery list into a database. If you give someone your email address, you’re probably giving them permission to give it to someone else.

No Interest

Credit card interest payments eat into and can even wipe out the value of credit card points and benefits. Know how much you need to pay every payment period in order to avoid interest. And if you’re not sure, pay off the entire balance every month. Do not treat credit cards as a way to spend more money than you have. Treat them as a way to get more value out of the money you’re spending judiciously anyway.

If that means you have to stay out of credit card rewards until you have your debt paid off and can keep your credit card spending in line with your income, then that’s step zero and there’s nothing wrong with that.

Understand Credit Score Basics

Opening new credit cards doesn’t automatically hurt your credit score nor is canceling a card necessarily better than holding on to one you don’t use. There are multiple factors to consider when opening or closing your account:

  1. Payment History. Paying on time is good. Late payments are bad.

  2. Credit Utilization. The closer you are to maxing out your available balances, the worse your score.

  3. Average Account Age. The higher the average account age, the stronger your credit score. Opening a new card isn’t a death sentence, keeping an old open can be helpful.

  4. New Accounts. Opening a lot of new accounts can ding your score temporarily, but it’s weighted less than the above factors.

  5. Credit Mix. The more diverse types of credit accounts you have, the better. But if you don’t have a mortgage or student loans or something else, it shouldn’t be a significant detriment to opening new credit cards.

There are plenty of good articles written by more knowledgeable people that explain credit scores. Here are a couple I like:

Understand Credit Card Sign-up Rules

As an example, Chase has a famous 5/24 rule where they disallow new card applications if you have opened five new credit cards (across any bank, but not every card counts) within the last 24 months. There are also rules about qualifying for sign-up bonuses (e.g. American Express allows customers only one sign-up bonus per currency within a specific time-frame). If you’re considering opening a number of new credit cards in a short amount of time, consider the order you sign-up in so you don’t close any doors down the road.

Don’t Reflexively Avoid Annual Fees

The value of sign-up bonuses and benefits can often exceed a card’s annual fee. Before saying “no” to an annual fee of $59, $95 or $550 per year, think about the monetary value of everything the card offers and weigh it against the fee.

Prioritize Sign-up Bonuses

Credit card sign-up bonuses are the easiest way to rack up big chunks of rewards points. Spending $2,000 to $4,000 can easily get you 20,000 to 60,000 points, a far higher return than everyday earn rates. When you get a new card make a plan to meet the sign-up bonus spend threshold, even if you have to put your day-to-day cards down for a spell.

In Sum

Sorting through what rewards and credit cards would help you out can feel super daunting. There are a lot of options out there and doing research can sometimes take up so much time that the financial savings don’t even seem worth it. But fear not. Stick to the basics, research the brands or locations you’re interested in or use most, and take a first step when you’re ready. You’ll learn what works for you and so long as you keep your spending in one with income and pay off your cards you’ll get something out of it.