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Credit Card Rewards Theory

How Credit Cards Earn You Rewards

Credit cards come with some very impressive monetary rewards that generally come free if you play the game right (never pay interest).  The rewards can vary from status at hotels and airlines to thousands of dollars in cashback and travel.  There are some catches but we will dive into this process and show that with some self-discipline (paying off cards IN FULL every month) you can generally realize these rewards just by changing the way you pay for everyday expenses.

Credit Card Reward Catagories

Credit card rewards come in two general categories.  The first comes in the form of a sign-up bonus.  These are generally the most lucrative and come with requirements to earn.  The requirements vary card to card but typically, you will be offered an upfront point bonus for spending a certain amount of money in the first 3 months.  This spending requirement, or minimum spend, will range from $1k to $5k depending on the bank’s valuation of the bonus.  For example, if you signed up for a Chase Sapphire Preferred (CSP) you would be given 60k Chase Ultimate Rewards points if you spent $4k in the first 3 months of account ownership.  The American Express Platinum Card comes with 60k Amex Membership Rewards Points for $5k spend in the first 3 months.

The second form of rewards comes with ownership of the card account itself.  At the most basic this usually means points or airline miles earned per dollar spent but premium cards offer status at various hotel chains, airlines, and rental car companies.  Most offer travel protection insurance, price protection insurance, trip interruption insurance, and the list goes on, for all purchases made on the card.  Some go as far as offering airline and travel charge reimbursements from $100-$300 per year.

Credit Card Annual Fees

The major catch with premium cards is they usually come with annual fees.  I get it, it seems absurd to pay to own a credit card.  Get over it.  If you absolutely cannot stomach paying an annual fee then just use the rewards to pay it for you.  60k chase UR points are directly redeemable for a $600 statement credit.  That means after the first year’s $95 annual fee on the CSP you are still $505 in the green.  The points are usually worth more when redeemed for travel but even at their least valuable (cashback), you are making money by signing up for and using credit cards as opposed to cash and debit.

Minimum Spending, or ABC (Always Be Churning)

All this to say the most lucrative way to play the credit card game is to always be working on a minimum spend.  We all have a certain amount of money that we spend each month on bills, food, entertainment, etc.  If you just divert all of that spending to one credit card at a time until a minimum spend is met you can open another and repeat gaining 10’s of thousands of points along the way.  All you have to do is spend what you normally would on different little rectangles.  That’s it, that’s the big secret. There are no downsides, there is no fine print, there is just signing up for credit cards and diverting normal spending to them in regimented intervals.  We’ll dive more into the nuanced strategies per card in later articles.

The Number One Rule of Churning

Just remember, the first rule of credit cards is to never, ever pay interest.  If you aren’t paying off your statement in full every month, you will be charged interest.  If you pay interest then you start paying for your rewards and all of this is for naught.

Continue to Points and How to Use Them

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