In trying to save more money, I’ve recently worked on improving my credit card game. I’ve learned much from my friend Baron who’s a pro at “credit card juggling,” the art of maximizing credit card rewards. He frequently pays for business class seats on international flights using only his credit card points. But, of course, he considers it a hobby and spends a good deal of time on it. Under Baron’s tutelage, I’ve become a strong amateur. Credit card cash back rewards are not going to make me rich, but every bit of savings helps.
From this journey, I’ve come to appreciate how everyone can save hundreds or thousands of dollars each year by spending a few minutes to apply for some cash back credit cards. Once set up, these benefits accrue for years with no additional effort.
Let’s begin by discussing the objective of what I’ll call “credit card game”:
The objective is to maximize your overall credit card rewards, while minimizing your effort and annual fees, and avoiding all interest charges and late fees.
Mathematically, we can think of it as:
Credit Card Rewards = % Cash Back * Credit Card Spend + Introductory Rewards – Annual Fees
To take a simple example, this equation implies that if you spend $10,000 on your credit card that offers 1% cash back and charges no annual fee, you would get $100 in credit card rewards.
As my equation suggests, you can increase your credit card rewards by managing 4 levers:
- % Cash Back – Identify credit cards that offer the highest overall % cash back for what you spend money on. In the $10,000 spend example above, each 1% you increase your % Cash Back, you get an additional $100 of cash back per year.
- Credit Card Spend – Pay for as much of your spending using rewards credit cards. Pay for your spending using the credit card with the highest % cash back rewards.
- Introductory Rewards – Obtain all credit card introductory rewards offered for your new credit cards. Many credit cards offer introductory rewards in the form of, “If you spend $X within Y months of receiving this credit card, you will get $Z of rewards.”
- Annual Fees – Choose credit cards with no annual fees, or minimize your annual fees.
Now that we have this framework, I’ll share my thoughts on how to think about each:
Maximizing % Cash Back – You can increase your cash back by paying for items with the credit card that offers the highest rewards for that particular item. Cards with cash back rewards fall into two primary categories:
- General Cash Back Cards: At minimum, I would recommend getting one general cash back card, which should have a baseline cash back of 2% of purchases and no annual fees. This NerdWallet article ranks several good 2% cash back cards.
- Spend-Specific Cash Back Cards: To get slightly more advanced, I would recommend getting spend-specific cash back cards for stores and spend categories where you spend a lot of money. These ideally have no annual fees. My favorite no annual fee cards include the following cards, all of which I use regularly:
- Amazon Prime Chase Visa (my referral link, please use it if you apply) – 5% cash back on all Amazon, Whole Foods, and Audible purchases if you are an Amazon Prime member. 2% cash back on gas, restaurants, and commute. 1% back on everything else.
- Chase Ink Small Business Cash Back Card (my referral link, please use it if you apply) – 5% cash back on spend for cable, internet, cell phones, video streaming subscriptions, and office supply stores. Just set your auto-pay for these services to this card. When you apply, you must identify yourself as the sole proprietor of a small business.
- Target Red Card – 5% discount on all Target purchases.
- PayPal Mastercard – 3% cash back on all purchases made with it using “Pay with PayPal” if online merchants offer it. 1.5% cash back on everything else.
- All ecommerce stores that use Shopify or eBay offer the “Pay with PayPal” option.
- You can also pay your US federal tax balances with “Pay with PayPal.” Online payment vendors charge ~1.8%, so you end up with a net ~1.2% cash back on federal taxes you pay online. Here’s information from the IRS about paying federal taxes online using credit cards.
Introductory Rewards Tips: An ideal time to apply for credit cards would be before you make a major purchase that could be paid for using credit cards, such as booking vacations, buying appliances, etc. You can also use the new credit card to pay for all of your normal purchases. Or just pay for a portion of your federal taxes using the new credit card, but this will cost you 1.8%.
The art of credit card juggling aims to obtain the best introductory rewards by frequently applying for new credit cards. Once those rewards are obtained, you cancel the credit cards before incurring more annual fees. This can take a considerable amount of time and there are limits (see the 5/24 rule section below). But, as my friend Baron’s case shows, the rewards can be valuable. Another friend plays the juggling game by paying for his federal US income taxes using credit cards, asking his employer to withhold nothing for taxes. For myself, I’ve decided to juggle cards lightly. I ask my friends who are juggling masters for card recommendations to minimize my own research time. If you decide to take this path, you should consider how much time you’re willing to invest and limit yourself to that.
Minimizing Annual Fees: Many premium rewards credit cards offer potentially higher levels of rewards, but charge an annual fee. To offset the annual fee, you need to spend enough on that credit card so its rewards offset the annual fee (see equation below). You won’t benefit from credit card rewards until you offset your annual fees. You’ll have to decide whether the higher levels of rewards are worth the annual fee, given that you need to spend a certain amount to simply offset the annual fee.
Spend Required to Offset Annual Fee = [ Annual Fee ] / [ % Cash Back Reward ]
Avoiding Interest Charges and Late Fees: To avoid interest charges and late fees, make sure you pay off your credit card balances on-time. This could mean developing a habit to pay your bills at a certain time each month, or setting up the credit card balance auto-pay. I don’t like to use auto-pay because I won’t be able to detect fraudulent charges made to my cards. It’s easier to dispute fraudulent charges before you pay the credit card company for your balance. If you do accidentally pay late and incur interest charges and late fees, you can call your credit card company to ask for a one-time courtesy forgiveness of these fees.
Comparing Credit Cards with Non-Cash Rewards: Some credit cards offer travel rewards points for your credit spend, rather than cash back. These points have a less straightforward cash value, but you can still estimate their % cash back equivalent in order to compare them against other credit card options. You can find the estimated cash value of reward points with a quick Google search, which you can translate to an effective percent cash back. Here’s a Bankrate article with more details.
Other Benefits: Many credit cards have other great benefits that few consumers take advantage of. I’ll summarize my favorite common benefits below, but you need to read your credit card benefits guides carefully to see what they offer:
- Travel insurance – Trips and rental cars paid for using the credit card receive this coverage. This benefit generally eliminates the need to pay for additional trip insurance and rental car insurance coverage.
- Purchase protection – If a purchase paid for using the credit card is damaged or stolen within a 90 to 120 day window, the credit card will refund you. To file a claim, you will need to provide the original receipt, as well as other paperwork. More details on this NerdWallet article.
- Extended warranty – Many credit cards offer 1 year of extended warranty beyond the manufacturer’s warranty for purchases made on the credit card. More details on this NerdWallet article.
- Zero foreign currency transaction fees – Make sure you double-check that this benefit exists for the credit card you take on your international trip.
5/24 Rule – Many credit card companies have an unwritten rule that they won’t approve new credit card applications for a consumer who has obtained 5 new credit cards in the last 24 months. This rule won’t affect most people, but credit card jugglers pay close attention to this. Here’s a Frequent Miler article on the 5/24 Rule.
Build a Credit Rating with Secured Credit Cards: If you’re starting out and don’t have a credit rating that allows you to get a card, start with a secured credit card to build your credit history. These cards allow you to deposit a few hundred dollars, then offer you a credit limit based on the amount you deposited. To build your credit rating, you need to use this card and pay off your balances for several months. Here’s a NerdWallet article about them.
How Do Credit Card Companies Pay for Rewards? Processing Fees and Interest Fees
These credit card rewards may seem too good to be true – you spend money as you normally would and you get money back! Magic! How do credit card companies pay for these rewards? The answer lies in their business model.
When you pay for something using your credit card, the merchant generally pays fees worth 1.5% to 3.5% of the purchase price. Larger merchants are able to negotiate lower fees. That takes a chunk of money off the table for the merchant to simply accept a payment. Where does that money go?
The largest share of this money goes to the bank that issued the credit card to the consumer, which is called the “issuing bank.” The issuing banks use these fees to pay for marketing their credit cards and paying for rewards, and keep the remainder as profit. Because issuing banks are providing short-term loans to the consumers, they are also making money off of interest charges on loan balances. Interest is a huge source of profits for issuing banks.
For more background on how credit card payments are processed, you can see this article from Stripe.
And if you really want to nerd out, you can learn about the credit card industry’s history, economics, and competitive dynamics in this Acquired Podcast episode on Visa.