We often discuss spending in the financial planning world. “Are you spending too much?” “Could you be spending more?” We frame the conversation in terms of a dollar amount, but often we don’t ask, “Are you spending in the most efficient manner?” More specifically, “If you are using credit cards, are you using one that suits your lifestyle and provides benefits that are valuable to you and your family?”
A vast network of companies, from card issuers like Visa and Mastercard, to banks, to behind the scenes processors, to retailers, all benefit from your annual credit card spend. Credit cards offer convenience for online and point of sale transactions, but you may be able to take advantage of additional benefits beyond the convenience factor.
Every card issuer touts their card as the perfect card for everybody, but everyone’s situation is unique. There are a host of credit card options, but they can be roughly broken into the following categories:
- Cash Back
- Travel rewards
- Low interest
- Retail/Entertainment
Cash Back
Cash back cards are the most common type of rewards credit card, and the most basic. Step 1: Spend money. Step 2: Get cash back. Step 3: Enjoy! These cards have become extremely competitive recently with most cards offering at least 1% back on everything and an additional bonus in certain categories. If there is one category in which you spend most of your money (like restaurants), having a cash back card with a 3% return on restaurants can be extremely valuable. Some cards offer periodic bonus cash back on certain spending categories on a rotating basis. Understanding your spending and your rewards options will be helpful when considering cash back cards.
Travel Rewards Cards
Travel cards are built for regular travelers and can be advantageous to those who are constantly on the move. Travel cards generally award you points for making purchases and those points can be redeemed for different types of travel expenses, most commonly flights, rental cars, or hotels. Additionally, travel credit cards can come with some terrific perks and a much better percentage return than a traditional cash back card. Some perks include travel and primary car rental insurance, ability to transfer points to other partners for better travel redemption, membership to airport lounge networks, and other premium benefits.
For the infrequent traveler, a travel rewards card may not be the best fit. These cards often come with an annual fee, starting at $95 and reaching as high as $550 – however, that annual fee can be worthwhile for frequent travelers who use credit cards for most of their spending needs, and often times the value of the benefits significantly exceeds the annual fee.
Low Interest Rate Cards
Lower Interest, balance transfer, and 0% introductory rate cards all fall into this category. These cards are designed for people who carry a monthly balance. Having one or two of these types of cards can provide a lower than average interest rate or lower cost for borrowing money. If you pay off your card each month, then these aren’t for you. Generally, carrying credit card debt is not advisable, however, if you don’t pay off your card each month, these can save you significantly more money than the 1.5% cash back you could get with a rewards card.
Retail/Entertainment
Similar to travel cards in that they offer rewards that can only be used in certain places, Retail/Entertainment cards can range from a Macy’s card to a General Motors card to a sports card (MLB, NFL, Cincinnati Reds, etc.). These allow consumers to get very specific with the type of reward they want. If you spend a lot of money at Macy’s, then it may make sense to have a Macy’s card. However, using your Macy’s card at Kroger is not the best choice.
Understanding where your spending occurs and what type of benefits are right for you is extremely important. Having the right card, or cards, allows you to maximize the benefits for different purchase transactions. As you can see in the chart below, each type of card is best for a different type of transaction.
The more you understand your own situation, the more informed a decision you can make. Using an aggregator website like Credit Karma can be an easy way to compare options, and you don’t need to sign up to use their tool. Taking the time to understand your current cards’ benefits and see if there are better options can save you hundreds or even thousands of dollars a year.
As always, please reach out to your Foster & Motley advisor if you have any questions!