Charging everything can offer tremendous rewards, but it can damage your credit scores...overspend and it may cost you money in fees and interest.
Racking up rewards is getting easier as a growing array of businesses, utilities and government agencies accept plastic payments. Virtually all household and business bills can be charged automatically to credit cards, as are most other purchases.
The number of billers willing to accept credit cards has grown so quickly in recent years that heavy-chargers often express frustration when they come across one that won't. Nearly 60% of credit card solicitations include some kind of rebate or rewards program, according to market research and there are thousands of different programs from which consumers can choose.
As the offers have mushroomed, so has the resolve of some card holders to squeeze every possible dollar, point or rebate from their spending. Sometimes that means switching cards based on the type of purchase and program. Some find it easier to track their spending, for example, and many prefer paying one or two larger bills each month rather than several smaller ones.
Racking up rewards can, however, have its risks:
Interest rates on rewards cards are high. If you carry balances, you shouldn't use rewards cards because the hefty interest rates more than wipe out any benefits. Instead, transfer your balances to a good low-rate card and concentrate on paying off your debt. When you're in the position to pay in full every month, then you can go shopping for a great rewards card.
There is no one-size-fits all. Which is the best rewards card depends on your personal circumstances, your lifestyles, and your spending habits. Finding the best card or combination of cards requires research and vigilance because:
The deals change constantly.The more generous the reward, the more likely it is to change. Consumers who want to play the rewards game for all its worth has to invest at least some time in monitoring the deals.
Many cards have caps, tiers and other limits. Several cards that offer 2% to 5% back on certain purchases also limit the annual rebate or reward you can earn to $300 or so. That means big spenders have to monitor their rewards and be ready to switch to other cards when they hit their limits. Other cards require substantial spending before their best deals kick in.
Chasing rewards can hurt your credit. Just applying for a card can ding your all-important credit scores by 5 points or more, and the application can affect your credit for a year or so. That's why Fair Isaac Corp., which created the leading FICO credit-scoring formula, advises consumers to apply for credit "sparingly." You certainly don't want to apply for a credit card while you're in the market for major borrowing such as a mortgage or an auto loan; wait until your loan closes before you add a card to the mix. Also, closing old accounts isn't advised if you're trying to improve your credit because shuttering credit cards can ding your scores.
Finally, watch your balances. You don't want to max out your cards, or even come close, because using up your available credit limits can have a big negative effect on your scores. It doesn't matter that you pay your balance in full; the only balance that matters, for credit-scoring purposes, is the one that's reported to the credit bureaus, which is typically the balance showing on your last statement. If you regularly use more than 30% of your available credit on a card, you should ask your issuer for a higher limit.
If you're interested in finding the best rewards card, you'd be wise to do the following:
Monitor how much you spend. Review your credit card statements for the past few months to see what you're spending in categories such as entertainment, travel, groceries, etc. If you use personal-finance software such as Money or Quicken, you can quickly summarize your spending using the "report" features.
Review your current cards. A visit to the issuer's Web site or a phone call to customer service can help you find out what rewards programs are available and if they're running any promotions. You can ask if there's a better program based on your spending; you may be able to switch over the phone.
Review your bills. A biller that didn't offer the option of using plastic a few months ago may offer it now. Even some landlords are getting into the act. Charging recurring bills -- utilities, phone, insurance, whatever -- to your cards can help you build rewards without added cost, as long as you can pay the bill in full each month and don't max out your limits.
You can do better than 1%. Getting a penny back on every purchase used to be a decent deal, but now more-generous rebate programs mean you should be averaging at least 1.5% back on your spending.
Beware of annual fees. The best cash-back programs don't charge annual fees. A fee of $20 or $30 isn't exorbitant if you're getting hundreds of dollars in rewards each year, but you should be wary of paying much more, especially if you haven't been getting significant benefits from the program.
Limit your choices. You may be able to squeeze out more rewards by adding more cards, but you're adding complexity to your life. Every card comes with its own due dates, terms, rates and program details, all of which can change. Consumers who don't want to invest a ton of time in tracking their accounts should limit themselves to one or two cards. Also, consider setting up some kind of automatic payment plan to make sure at least the minimum gets paid on every card you possess. You don't want to overlook one and get slammed with late fees and damage your credit scores.
Beware of transaction fees. Government agencies increasingly allow consumers to charge taxes and other fees. Unfortunately, many of these agencies contract with credit card processors that charge fees of about 3% to process the transactions. Those fees offset and usually wipe out any rewards benefits from using cards