Editor’s Note: This story originally appeared on The Penny Hoarder.
Have you ever wanted to shave $50 off your credit card bill? Get a free gift card to your favorite store? Or hop on a plane to Europe without paying a cent?
All of that is possible with credit card rewards. If you have strong enough credit to qualify for one or more rewards credit cards — typically either cash back credit cards or travel credit cards — you can rake in major rewards for everyday spending.
We’ll walk you through how to maximize credit card rewards without taking on any high-interest credit card debt.
How Credit Card Rewards Work
There are two major types of credit card rewards programs:
- Cash back
- Travel (points or miles)
How Cash Back Credit Cards Work
With cash back credit cards, you earn back a percentage of what you spend with every swipe.
Flat-rate cards typically pay between 1% and 2% cash back on every purchase while some cards offer special, higher cash-back rates on specific spend categories, such as groceries, dining, gas or entertainment. Some cards pay as high as 6% cash back on things like groceries and streaming services.
You can redeem cash back as a statement credit to lower your credit card bill. Some cards will also let you redeem cash back rewards for a gift card or direct deposit to your bank account, or use your rewards directly when online shopping.
You could also earn a sign-up bonus when you open the credit card. (Learn more about maximizing sign-up bonuses through credit card churning.)
How Travel Credit Cards Work (Points and Miles)
With travel credit cards, you typically earn either points or miles with every purchase.
Much like cash back credit cards, travel credit cards may offer flat rates or may offer different levels of points or miles for various types of purchases, often rewarding travel purchases (such as airfare and lodging) with a greater level of points or miles.
Travel credit cards typically offer a few perks, such as:
- Trip insurance
- Lost baggage insurance
- No foreign transaction fees
- Fee credits for TSA PreCheck and/or Global Entry
- Exclusive airport lounge access
Beyond general travel credit cards, you can open rewards credit cards that are co-branded with an airline or hotel chain for more specialized rewards.
Each travel credit card program differs, but generally, you can redeem points or miles for flights, hotels and other travel-related expenses. Some credit card issuers have their own travel portals through which you can redeem rewards.
You may also be able to transfer the points or miles to various partners (such as airlines or car rental agencies), where the rewards points or miles might go further.
Some travel cards may also let you redeem your points or miles for gift cards or cash back for statement credits. However, you’ll typically get less value if you use your points for this instead of redeeming them for travel.
Like cash back credit cards, travel credit cards often come with sign-up bonuses.
How to Accumulate Rewards Responsibly
Credit card rewards can help you reduce your credit card bill each month, fund your travels and more. But to get the most out of your credit card rewards, you have to be strategic about how you spend.
- Choose the right card for you. Research all the best cash back credit cards and the best travel credit cards to determine which one best matches your lifestyle. For instance, if you drive a lot for work or school, pick a cash back card that pays out extra for fuel purchases. Or if you’re saving up for your dream honeymoon or big purchase, choose one of the best credit cards for welcome bonuses.
- Pay attention to cash back/reward categories: If your card offers a higher cash back rate for certain categories like groceries, don’t forget to use that card when you go to the store. Same with travel cards. Know before you start planning a trip if you get more points or miles for booking certain hotels or airlines.
- Cover all your bases. If you can responsibly manage multiple credit cards, consider applying for multiple rewards credit cards (over time, that is) so that you can get the maximum rewards no matter what you’re swiping your card for: plane tickets, hotels, groceries, cell phone, streaming services, gas — you name it.
- Don’t overspend. Before any purchase, ask yourself, “Would I be buying this if I wasn’t going to receive any rewards?” If the answer is no, resist the urge to spend. After all, the value of the rewards will never actually outweigh the cost of the item you’re purchasing — only make purchases you need.
How to Use Rewards Wisely
Earning credit rewards takes careful strategy. You need to spend enough with a single card to earn the sign-up bonus in the specified timeframe, know which card to swipe for which type of purchase and make sure you pay off each card in full every month to avoid interest.
But using credit card rewards also requires careful strategy to ensure you get the most out of them. Here’s how to maximize your credit card rewards:
- Avoid low-value redemptions. You might be able to get special merch or gift cards with your credit card rewards, but that might not be the highest-value strategy — look out for your credit card issuer’s promotions to get gift cards “on sale.”
- Focus on high-value redemptions instead: For cash back cards, statement credits are usually the way to go to get the most out of your rewards. For travel credit cards, booking through the credit card’s travel portal or transferring points or miles to a partner portal is often the best way to stretch your rewards further.
- Watch expiration dates: Sitting on points or miles while waiting for the best time to book a trip can be smart — if you pay close attention. Many rewards have expiration dates, so make sure you redeem yours before they go away.
Common Mistakes to Avoid
When you have a rewards credit card in your wallet, you can rack up some serious savings through cash-back programs or travel points and miles. But you can also do a lot of harm to your finances if you’re not careful.
Here are some ways to avoid common credit card mistakes.
Overspending to Get Rewards
The greatest risk of a rewards credit card is overspending just to earn a reward. Make a budget and stick to it. Only swipe your card when you would need to make the purchase, regardless of whether you’re earning rewards or not.
Not Staying on Top of Payments
Pay your card off in full each month to avoid accruing interest. Otherwise, the cost of the interest may outweigh any rewards you earn.
Forgetting Annual Fees
Each year, before paying an annual fee on a rewards credit card, do the math to make sure the rewards you’re earning still justify the annual fee.
And remember: The rewards shouldn’t merely pay for the annual fee. The rewards for a card with an annual fee need to be so valuable that, even after paying the fee, they still outweigh the rewards you’d earn from a card with no annual fee.
Losing Your Points
Some people like to hoard credit card rewards to save up for one major purchase, but this can be risky for a few reasons:
- Inflation: In today’s economy, the cost of goods and services is almost always rising. What costs $1 this month might cost $1.05 next month. But credit card rewards left sitting in your account aren’t growing to keep pace with inflation. With each passing month, the rewards you’ve earned will be worth less and less.
- Devaluation: The Consumer Financial Protection Bureau warns that credit card issuers can “devalue” points over time. Redemption policies can change through the years; what previously cost 1,000 miles or points may suddenly require 1,100, for instance.
- Expiration: In some cases, credit card rewards may expire if not used within a certain time period.
- Missed payments: Rewards aren’t only an incentive to spend more; credit card companies use them as an incentive for you to make on-time payments. Depending on your contract, a missed payment could trigger a removal of rewards.
Make the Most of Your Rewards Credit Cards
Rewards credit cards can make a huge difference in your finances if you manage the cards responsibly, don’t overspend, and make strategic decisions when redeeming your cash back, points or miles.
Treat your rewards cards as a bonus — not an incentive to overspend. And don’t keep your cards on autopilot. Regularly review fees and rewards and compare against competitor credit cards to make sure you have the best cards for your needs.
