Getting the Greatest Return on Your Credit Cards

The credit card industry has become a contest of who can offer the greatest benefits - promotional and ongoing. That includes cash back, points programs, airline miles, gasoline discounts, 0% balance transfers and cash advances, interest from money-market savings accounts, credit monitoring, free gifts, and more. With all of these benefits to choose from, and no single card offering quite the same ones in the same combinations, how are you ever to know which card will give you the greatest return based on your unique lifestyle and saving, spending, and bill-paying habits.

First and foremost, if you don't pay your entire balance in full each month, you will incur more in finance charges and possible fees than you'll reap from the various benefits. If you carry a balance on your credit cards from month to month, then no amount of rewards will compensate for your expenses. Under those conditions, no benefits are going to benefit you. And that is, of course, what the credit card companies are counting on.

Once upon a time, frequent flyer miles were the singular credit card benefit. The average return on these programs is usually 1-1.5% of how much you spend. Consider a $500 ticket that requires you to accrue between 25,000 and 35,000 to get a free flight. If, as most airline miles programs do, your credit card company calculates miles on a dollar for dollar basis, then that means it takes $25,000-$35,000 in credit card expenditures to earn a $500 airline ticket. Not a very good deal at all when you look at it that way, is it?

With this as a point of comparison, let's examine a few other types of credit card benefits. So far, the airline mile card seems more beneficial than a 1% cash back card, though not by much. But if you can find a cash back card that gives 5%, even if it's just at supermarkets, drug stores, and/or gas stations, that could save you a bundle over the long term - provided of course that there are no hidden charges and that you pay your balance in full each cycle. Otherwise you'll be losing 8%, 13%, 20% or more to get that 5% cash back. Oops.

When examining credit card offers for cash back cards with generous cash back percentages (say, 5% or more), be sure that if the fine print restricts these benefits to only certain types of purchases and/or from certain types of establishments, that they coincide well with your intended spending plans for this card. If you do most of your monthly shopping at warehouse clubs, for example, then these types of cards may not be able to serve you well. Just make sure that any cash back card's participating vendors are vendors with whom you actively and regularly do business.

Also be aware when reviewing 5% cash-back cards that many of them have annual limits on the dollar amount of cash back you can receive. For example, some cards only allow you to earn a maximum of $500 per year in cash back. When you reach that point, you may wind up putting that card aside and getting another, similar card that would give you say 1% of charges up to $7,500 and 5% on charges thereafter, up to $50,000. While these cards seem well suited for big spenders, one must keep in mind that far fewer vendors accept American Express than their contemporaries - MasterCard, Visa, and Discover.

Store cards - Sears, Macy's, Best Buy, Target, etc. - are another option that come with an enticing benefit but are also fraught with perils. If you're making a huge one-time purchase at a particular store, you can often get 10% off that purchase by signing up then and there for a store credit card. Before you sign on the dotted line, take a couple of things into consideration.

First, you can only do this once (per store, per card). How much will you really be saving on this purchase and is it worth it to have your credit checked and your credit score affected as it invariably will be by the taking on of yet another credit card? Having too many credit cards looks bad on your credit report, as does frequently applying for new cards and/or frequently canceling existing cards. Also, most often, store cards have comparatively tiny credit limits and exorbitant interest rates. Read carefully.

If you think you can save a large amount of money on a purchase, you aren't carrying too many credit cards (say, more thanfive), you haven't recently gotten any new cards and you don't plan on applying for any major loans in the near future - home loan, car loan, major credit card with a bigger limit - then go for it! Just make sure you have the discipline to either cancel the card when you've paid off the initial purchase or put the card in a drawer and hardly ever use it except for purchases you can pay off in full each payment period.

Most importantly, remember that all great plans can (and often will) go away at some point. Just because you selectively and strategically acquire and use rewards cards and cards with other benefits, it doesn't always work out as you intended, and often through no fault of your own. Even if you stick to your plan with diligence and discipline, credit card companies responding to cardholders exploiting their various loopholes can change their policies on a whim. All they have to do is inform you. But they certainly won't be asking if their changes will in any way negatively affect your plans. That's for you to look out for, and you alone.

There's no harm in trying to get a little more out of your credit card usage, unless you neglect to do your due diligence, read all the fine print, and whatever you do - pay your balances in full at the end of each and every billing cycle.

Kenneth C. Kelly is the President of Strativia, a financial management software development and services company specializing in applications for personal and business use.  Strativia is the developer of Budget Forecaster, a sophisticated home budget and personal finance management software package.  Website: www.strativia.com.  Contact: info@strativia.com. 

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