I love credit-card rewards. They’re fairly easy to earn and they can give your budget a nice boost. I personally use my rewards for fun things I want, such as vacations or a new big screen TV. However, you can easily get caught up in the rewards game and end up paying more money in interest and fees than the rewards you’ve earned.
How can you avoid that fate? Make sure you don’t break these 4 rules you must follow when earning credit card rewards.
Never carry a balance (or pay interest)
First and foremost, you should never carry a balance or pay a penny in interest on your credit cards. Carrying a balance is the quickest way to erase your earnings from credit card rewards as interest rates on rewards cards are often higher than your basic no-frills credit card. While you may earn anywhere from one to six percent cash back on your purchases, that doesn’t stand a chance against your 18.99% interest rate.
Avoid carrying a balance by checking your balance often. Make sure it never exceeds what you can pay off in full each month. You can also automate your payments (in full) or set a reminder on your calendar to make sure you never forget to pay your bill on time.
Don’t spend more than you would with cash
It might be tempting to spend more money to get more rewards, but you must not spend more with a credit card than you would with cash. Why? Any spending above your normal cash spending levels will destroy any value you earn in rewards. If your spending increases by 10% but your rewards are only 2% cash back, you’ll be 8% in the hole. That doesn’t sound profitable.
People don’t feel the pain when they make credit card transactions like they do when they spend cash, so make sure you figure out a way to make each purchase register in your mind. Whether you have to immediately add your purchases to your budget spreadsheet or you scan your receipt to your favorite personal finance app, you must keep tabs on your spending.
Read the terms and conditions (and other fine print)
Terms and conditions are those boring pages of small print that no one wants to read. You must read them. Yes, I know they’re not fun and they can be hard to understand, but credit card companies often hide many rules of their rewards programs in these terms and conditions statements.
If you want to maximize your rewards, it’s important to know whether stores like Walmart count as a grocery store for your bonus cash back category. It’s also important to know that you can only start redeeming your cash back at $25 and your total cash back limit for the year is $300. All of these things can be found in the terms and conditions or other fine print that come with your card. Read them.
Don’t apply for new cards before major purchases
This last rule is one that many people never consider, but it could easily cost you the most money if you break it. You should never apply for a new credit card before a major purchase that will require a loan such as a mortgage or car loan.
Why? Opening new credit can ding your credit score by a few points. If your score was barely above the line in the sand where you qualify for the best rates, opening a new line of credit can drag you down below that line.
While the difference in interest rate may be small, the total cost of the extra interest you pay over a five-year car loan or 30-year mortgage will almost always exceed any value you’ll get from earning more credit card rewards. Don’t risk it.
Credit card rewards can be very valuable and I personally have used them to pay for a free cruise. Just remember to follow the four rules above and you should be in good shape when it comes to earning credit card rewards.