Leverage (v) can be defined as: To use; to take full advantage (of something).
Many of us have car payments, mortgages, credit card debt, HELOCs (home equity line of credit), and the seemingly worst of the worst - student loans. If we have any of these lines of credit, we are paying interest on what we owe the lender, which can range anywhere from 1% to 29.99%, or more. For the most part, we are being leveraged by our creditors, instead of the other way around! So how do we turn the tables? Credit card rewards! Let’s tackle some of the different types of rewards cards out there.
Cash Back Cards
It’s exactly as it sounds - you spend money using the card, you get cash back. In general, your cash back cards will have a cash back percentage ranging from 1-5%, some with category restrictions, some without. There are more than a handful of cash back cards out there. Many offers range from 1-2% cash back on everything you spend on, to 2-5% only if you are spending in certain categories such as -- gas, groceries, drug stores, dining out, etc. These cards are a vital part to your leverage portfolio, as they can be great complementary cards to your airline/hotel rewards cards. Why do I say complementary? Suppose the flight you want to take does not have any award seats available, what do you do? You can pay for it with your cash back rewards card and make some of your money back with the purchase, to be used another day. Or if you have been spending a good amount on those cash back cards, you now have a reserve of travel funds to cover those costs you were not able to cover through the use of points!
In 2013, the average American spent approximately $23,000 on expenses that they could have used a credit card for (excludes housing). So if you used a cash back card, for all these expenses, you would get at least $230 back per year on a 1% card! I’ve only recently gotten more into these cash back cards, and for the past 2 months, my wife and I have been averaging approximately $450 in cash back a month, and will be averaging more starting this month! And this is without going into debt to hit what would amount to $9000 of spend per month! Trust, me, I don’t make nearly enough to hit these numbers on my salary alone, however, I have some tricks of the trade that I use and teach my clients, via my knowledge of how to create a multiplier effect with your spend.
Points Rewards Cards
The cards in this category usually have a point system assigned to them. Usually they accrue at 1 point, per dollar spent. Sometimes they have certain categories and time frames in which you earn more points - i.e. 5x the points at Starbucks from January to March. Some rewards programs that fall under this points category are American Express’ Membership Rewards, Chase’s Ultimate Rewards, and Citi ThankYou Points. Many of these cards have rewards programs attached to them that allow you to redeem for gift cards or products at retailers like Amazon, Best Buy, Target, Applebee’s, etc. For the most part, each point is generally worth $0.01, sometimes even less than a point per dollar, but I always advise my clients to stay away from these cards! Thus, if you have 10,000 points, and we are using the $0.01/point example, you would be able to redeem for a $100 gift card. Are you maximizing your leverage by redeeming gift cards at $0.01/point? I would say NO! Many of these points programs have travel partners that you can transfer points to and get greater than $0.01/point in value. As an example, my wife and I got approximately $0.12/point when we transferred our points to United Airlines for our round-trip business class flights to Asia! If we are comparing apples to apples, that is a $100 gift card versus a $1200 gift card!
Airlines often times will co-brand a credit card with a bank (the “issuing” bank) -- For example:
- Delta/JetBlue partners with American Express,
- Southwest/United/British Airways with Chase, and
- American/U.S. Airways with Citibank & Barclays
You might be asking, why do banks and airlines do this? It’s because banks now get their customers to spend and use their service more, the airlines get more “loyalty” from customers, and customers, if they leverage the system correctly, get value for their spending. With airline miles cards, instead of cashback or points, you are now earning a mile(s) per dollar spent. Sometimes there are increases such as 2-3x the miles when you purchase flights using the card, as well as occasional bonuses such as getting 50% more miles when spending during the months of March through June. For the most part, 1 mile earned per dollar spent is the norm for most programs, but dollar/point redemption value can be a wide range and that’s where good strategies to leverage the extra rewards promotions is key to maximizing rewards! Let’s say you were to redeem 20,000 points for a flight that costs $500, you would essentially be getting 2X (e.g. double) the rewards per dollar spent than if you redeemed those same points for gift cards! That is why redeeming for travel is one of the best ways to leverage credit card rewards!
Just like airlines, hotels have gotten into the credit card game as well, and for many of the same reasons as the airlines have. Chase partners with IHG (Intercontinental Hotel Group)/Marriott/Ritz Carlton/Hyatt, American Express with Starwood Preferred Guest/Hilton, and Citibank with Hilton. Very similarly to the airline cards, there are certain ways you can spend on them to accrue less or more points. Redeeming for hotel stays may not as be as lucrative as air travel redemption, in a dollar/point maximization sense, but still a much wiser decision than for gift cards or products!
As I mentioned in one of my previous posts, the best part about having all of these points is that they allow you to have options. Yes, I’m a believer in maximizing every point for it’s maximum dollar value, but at the same time, if you have a boatload of points and you prefer to redeem for an iPad, why not?
In listing all of these different types of cash back/points/miles programs, another intention of mine is to point out the benefits of diversification. We often hear talk about diversification in our investments (401K, IRA’s, etc.), but the same truths apply here -- don’t put all of your eggs in one basket. If one program largely devalues their points (making their redemptions more costly) or award availability for seats/rooms are sold out, then you have another program you can turn to!
With all of that being said, if you are using a credit card without any sort of points/rewards/mileage/cash back program attached to it or if you're not maximizing those rewards programs, you are wasting your leverage! Isn’t it about time you used your credit cards to make profits (miles/points, cash back, etc.) greater than they currently are?
*If you're interested in learning about the different benefits of each of these cashback/rewards programs, how to earn tons of points, maximize your redemptions, and how to travel for free, click HERE!