How To Create Your Credit Card Rewards Strategy

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Disclosure: This post might contain affiliate links. If you click through and make a purchase, I’ll earn a commission, at no additional cost to you. Read my full disclosure here.

Credit cards are now deeply embedded in our lives in most countries. At least in the US, most people pay the majority of their expenses using one. The goal of this post is to describe our credit card rewards strategy, i.e. to explain how my family is maximizing the benefits of using credit cards.

The credit card optimization plan has 4 steps:

Determine what you want to gain from the credit card rewards
- Either travel rewards or cash back
Analyse your expenses and determine which categories can be paid using credit cards
For each expense category, identify the credit card that maximizes the rewards and apply for the corresponding credit card
Pay the credit card balance in full at the end of each month (or be aware of the consequences)

Step 1: Our goal

In our family, we have determined that we want to optimize the cash back, since it is easier to achieve. I’ve been quite intrigued by the travel hacking posts that I read online, but I haven’t had the chance to dive deep into that area. As a result, this post will focus on maximizing cash back.

Step 2: Our expense analysis

For our expense analysis you can look at my previous post titled “The Ultimate Guide To Cost Cutting“.

Step 3: Identifying credit cards

Select card with a flat % unlimited cash back in all categories

This card will be used as the basis of the credit card rewards strategy. It’s used for all transactions that are not covered by any of the category-specific cards that are shown below. The best cards are:

Alliant Signature Visa
- Cash back:
  - Year 1: 3% cash back for all purchases during 1st year (no fee)
  - Years 2+:, 2.5% cash back
- Fees:
  - Year 1: No fee
  - Years 2+: $99
Fidelity Rewards Visa Signature
- Cash back: 2%
- Fees: None
Citi Double Cash Card
- Cash back: 1.99%
- Fees: None
Bank of America Travel Rewards
1. Cash back: 1.5% (becomes 2.625% if you keep $100k invested using Merrill Lynch)
2. Fees: None

By owning any of the above cards, you can “ignore” all the credit cards that offer up to 2% cash back.

We own the Alliant Signature Visa, as we spend more than $19,800 annually in that card (which justifies the $99 compared to the no-fee cards that provide 0.5% less cash back) and we don’t want to use Merrill Lynch as our investing platform.

Our Credit Card Rewards Strategy - Top Categories

Category analysis

The following matrix shows the top cash back credit cards for each spending category, their cash back rewards and any potential limits or fees.

Category	Credit cards
Home improvement	1. BofA Cash Rewards: 3% (limit: $2,500 purchases/quarter)
Groceries	1. PenFed Platinum Rewards Visa Signature: 3% 2. AmEx Blue Cash Preferred: 6% ($95 fee) 3. AmEx Gold: 4% ($250 fee)
Travel	1. AmEx Gold: 3% ($250 fee) 2. BofA Cash Rewards: 3% (limit: $2,500 purchases/quarter)
Shopping	1. Amazon Rewards Visa Signature: 5% on Amazon and Whole Foods 2. Target REDcard: 5% on Target 3. BofA Cash Rewards: 3% for online shopping (limit: limit: $2,500 purchases/quarter)
Utilities	1. USBank Cash+: 5%
Entertainment	1. Capital One Savor Rewards: 4% ($95 fee in years 2+) 2. Capital One SavorOne Rewards: 3%
Restaurants	1. AmEX Gold: 4% ($250 fee) 2. BofA Cash Rewards: 3% (limit: $2,500 purchases/quarter) 3. Capital One SavorOne Rewards: 3%
Gas	1. PenFed Platinum Rewards Visa Signature: 5% 2. BofA Cash Rewards: 3% (limit: $2,500 purchases/quarter)
Cell phone	1. USBank Cash+: 5%

In addition, there are 2 credit cards the have 5% cash back on a set of rotating categories that change every quarter (limit: $1,500 of purchases per quarter)

Our current credit cards

Alliant Signature Visa
- Cash back:
  - Year 1: 3% cash back for all purchases during 1st year (no fee)
  - Years 2+: 2.5% cash back
- Fees:
  - Year 1: No fee
  - Years 2+: $99
- We use it: For every purchase, apart from the ones described for the other 2 credit cards below
Amazon Rewards Visa Signature
- Cash back:
  - 5% (for Amazon Prime members) for purchases in Amazon and Whole Foods (3% for non-Amazon Prime members),
  - 2% for restaurants, gas stations, and drugstores
  - 1% everywhere else
- Limits: Unlimited cash back
- We use it: For all purchases at Amazon and Whole Foods
Chase Freedom
- Cash back:
  - 5% on a set of categories that change every quarter, 1% everywhere else
- Limits: $1500/quarter for the 5% categories
- We use it: For all purchases that belong to the 5% categories

Additional cards that we should add, based on our usage

PenFed Platinum Rewards Visa Signature: 5% for gas and 3% for groceries
USBank Cash+: 5% for cell phone and utilities
BofA Cash Rewards: 3% for a category of our choice (gas, online shopping, dining, travel, drug stores, or home improvement/furnishings)
- Limit: $2,500 of purchases/quarter. It becomes 1% cash back afterwards
Target REDcard: 5% on Target

Our Credit Card Rewards Strategy - Attention

Step 4: Always pay balance in full every month

It is very important to note that you should always pay the full balance at the end of every month. Credit cards have high interest rates, which can be as high as 30% or even more! If you forget to pay your balance, then this will be reported to the Credit Bureaus and your credit history will take a hit. At that point, you’ll have to take specific actions, in order to repair your credit. And if you are just starting your credit history, then it’s important to learn how to build better credit.

Finally, I’d like to talk about two misconceptions regarding the credit card rates.

Misconception #1: 30% annual interest rate means that I’ll pay 30% of my balance as fees after 1 year

In reality, the interest rate that you pay is compounded daily. A 15% annual interest rate corresponds to 30%/365 = 0.082% daily interest rate.

If the balance in your credit card today is $100, then tomorrow it will be 100.082.
And the day after that it will be 100.164.
So, after 1 year it will be almost $135! This is 35% of the initial balance

Misconception #2: If I don’t pay the balance in full at the end of the month, but sometime afterwards, then I will not pay any interest fees

Each credit card has a “Pricing & Terms” statement (which typically very people read). In that statement it clearly states:

How We Will Calculate Your Balance: We use the daily balance method (including new transactions).
How to Avoid Paying Interest on Purchases: Your due date will be a minimum of 21 days after the close of each billing cycle. We will not charge you interest on purchases if you pay your entire balance by the due date each month. We will begin charging interest on balance transfers and cash advances on the transaction date.

The above means that if you owe even $0.01 at the end of the cycle (instead of $0), then the interest keeps accruing during the following month and you will be paying credit card fees for that month. Even if you pay the balance in full at the end of the second month, you’ll still pay interest for that month! The only way to stop paying interest charges (assuming that you did not pay the card in month at the end of one cycle) is to pay the card in full for 2 consecutive cycles!