Why Credit Card Rewards Matter and How to Use Them

By Taylor Sutterfield, MAcc, CFP® , Financial Advisor    |   Cash Management, Debt & Financing

I am a credit card point junkie. I typically open up 3-5 new cards each year just for the sign up bonuses, and for the really good ones I’ll even have my wife sign up. The other advisors at our firm make fun of me because I’m always looking for the next deal. I sometimes feel like I’m a peddler on the street trying to convince others to follow my ways.

My main motivation for doing all of this coordination is travel. This year alone my family will fly to Arkansas, DisneyWorld, and stay at a hotel right next to Disneyland for 3 nights, and spend a day in Vegas all on credit card bonus rewards. With summer in full swing, many other people’s minds turn to travel as well. I wanted to take a chance to explain why I love the credit card game so much.

A word of caution

I get asked all the time, “Does opening up so many credit cards wreck your credit score?” At the time I’m writing this article, my FICO score is 838 (this lands in the “Exceptional” range). This is a week after I just signed up for my favorite bonus for the fourth go around. I don’t share this to brag about my credit score (that would be a weird flex), I share this to highlight that opening up a new credit card affects your credit score much less than most people assume. Your FICO score is affected by several factors, only one being a new credit opened.

The two largest inputs to your credit score are payment history and amounts owed, otherwise known as credit utilization. Lenders want to see your credit utilization at less than 30%. This means that if your credit limit is let’s say $5,000, and you consistently use around $3,000 per month, your credit utilization percentage would be 60%. If you opened a second card with another $5,000 of credit limit, but you still only used around $3,000 per month between the two cards then your credit utilization will have improved to 30%. This means you would have actually made your credit score better by opening up a new card.

The most important factor to keep in mind for all of this is payment history. You don’t want to miss a payment for any reason when it comes to credit cards. No potential sign up bonus or ongoing credit card rewards are worth more than the damaging effects of not being able to pay off your balance each month. Not only will it actually “wreck” your credit score, but the compounding burden of high interest will be a heavy weight that will be hard to get out from under. If you find yourself opening up credit cards to spend money you don’t have, or if you can’t pay off the balance each month, then you should probably cut up your cards and do without them.

The goods

Now assuming you can manage your spending and pay off your balance each month, credit cards can be really great tools. For starters they offer fraud protection that your debit card will not. If someone were to find your debit card they could drain every penny of your bank account. With credit cards you are able to claim the transactions as fraudulent and the credit card company will take your liability. 

Signing up for a new credit card usually comes with a welcome bonus. These new sign up bonuses can range anywhere from a few hundred dollars to well over a thousand dollars. During one year I flew my wife and I to DisneyWorld, Boston, and Hawaii all on two sign up bonuses. The retail value of those 6 flights were over $2,400.

Ongoing rewards will typically be anywhere from 1.5-2.5% of whatever you spend—which may not seem like a lot in isolation. But when you consider the average Dentist Advisors’ client spends about $15K/month, the results can add up. At a 2% reward rate, that is about $3,600 each year. Most people don’t care about 2%, but if you offered someone $3,600 you’d be surprised at what they’d be willing to do. The benefits can be much more exciting for practice owners. Many dental practice owners can have overhead of $50K/month or more. If we assume $25K/month can be spent on cards, the result will be around $6,000 in rewards for the year. I see people jump through hoops to save much less on their tax returns.

Which card is right for me?

The next question I get asked is, “Which card should I get?” Like all personal finance questions the answer is two words, “It depends.” What will you be using the card for? Are you planning on keeping it for the long term, or is this just for a bonus? What do you like to do? Do you want travel points, or cold hard cash? Personal finance is typically a lot more personal than it is finance.

My typical first response to this question is, “What type of rewards are you interested in?” If you like to travel, then you can’t go wrong with an airline card that has a hub in your most used airport. For example, most of my Utah clients will get a Delta AmEx card because they have a hub in Salt Lake. Airline rewards typically have better redemption than cash.

If you want flexibility where you can use rewards for travel, but also cash if need be then consider something like a Chase Sapphire card. These cards have points similar to airline cards, but they can also be used for cash if you need some flexibility.

If you are looking for cash, then look for a card that gives you 2% cash back on your purchases. Citi and Spark both have options for a 2% on “everything” card. If you are crazy like me, then you can get several cards that have different percentages for different categories. For example, I have a 6% grocery card, a 5% restaurant card, a 5% rotating category card, a 3% gas card, and a 2% for everything else card.

If you are looking for the best bonus, you will more than likely want to be flexible. Sign up bonuses will differ month to month. You can find one card offering 60K points in one month, only to offer 100K a few days later.

The bottom line

At the end of the day, finding the right credit card isn’t as important as making sure that you are using them correctly. If you are a maximizer like me, and you want to spend some time doing a bit of research then you can make a few thousand dollars extra each year. If you prefer the simplicity of one card, then rest assured that you can do that and it won’t matter too much in the grand scheme of things. The most important thing is that if you are going to use a credit card, that you do it responsibly. Don’t spend money you don’t have. Earn the interest, don’t pay it.

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