Could using your credit card lead to free money? Possibly — if you treat credit cards the same way you would a debit card.
For example, you sign up for a cashback credit card offering 5% on grocery store purchases and spend $12,000 on groceries in a year. By paying off your balance in full each month, you’re effectively treating your credit card like a debit card — spending only what’s available in your checking account.
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In this case, your diligent efforts could earn you $600 in rewards after a year, simply by continuing your weekly grocery run. However, swiping your credit card to earn rewards isn’t always what it’s cracked up to be.
Are credit card rewards really ‘free’ money?
The truth is, someone has to pay for those rewards, and it could be you. Many rewards credit cards charge an annual fee, which you need to pay to keep your card active. In return, you gain the opportunity to earn rewards, such as cashback on purchases or points redeemable for travel or merchandise. Some cards may also include perks like travel insurance and purchase protections.
Even if your credit card doesn’t have an annual fee, you’re not entirely off the hook. For instance, if you consistently pay off your balance but miss a payment due date, you’ll be slapped with a late fee and start accruing interest on the balance. These costs can quickly outweigh any rewards you’ve earned.
Retailers also bear costs when you use your credit card. According to a research report by Lulu Wang, an assistant professor of finance at Kellogg School of Management — Northwestern University, credit card networks like Visa and Mastercard use rewards to entice consumers to sign up for and use credit cards and increase the fees that retailers have to pay.
These increased fees are often passed on to customers through increased prices of goods and services. While you can’t control this, knowing how credit card rewards are funded can help you make informed decisions about your credit card usage. If someone is going to benefit from the rewards, why not let it be you?
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How to maximize credit card rewards
There’s nothing wrong with wanting to use credit cards to earn rewards, but having a strategy is a necessary evil to reap the most benefits.
- Review your budget: Look at your monthly budget and set spending limits for different types of spending. This ensures you don’t overspend and can pay off your balance in full each month. Regularly monitoring your spending can help you stay on track.
- Pay on time: Since late fees and interest can take away from your rewards, timely payments are key. Set up automatic payments to ensure you never miss a due date. Just ensure your checking account has sufficient funds when the payment is processed.
- Choose the right card: Select a rewards credit card that matches your spending habits. For example, if you want to earn travel rewards and frequently purchase gas, a travel rewards card offering higher points for gas station purchases may be for you.
- Calculate costs vs. rewards: If your card has an annual fee, ensure the rewards you earn outweigh the costs of the fee. For instance, if you’re paying a $95 annual fee but earning $600 in cashback, the card is still a good deal.
Using credit cards wisely can help you unlock meaningful rewards, but it requires discipline and planning. By treating your card like a debit card and being mindful of fees and interest you can earn enough rewards in a year to offset the charges.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
