You faithfully pay your recurring bills (such as utilities and insurance) with automatic payments set up from your credit card to simplify your life. Shouldn’t you take advantage of that card usage beyond convenience?
Credit cards can make life easier and, when properly managed, can certainly provide some impressive perks. From purchase protection to rental car coverage, the right credit card can save you money when used responsibly.
With the right strategy and a rewards program, credit card spending can be turned into free travel in the form of flights, hotel rooms and more. This is how to do it — and how I’ve done it, as a wealth adviser and financial planner with more than two decades of experience.
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Get to know your credit card rewards
If you already have a rewards card, you might not fully understand the rewards program and potential benefits. Start by auditing your rewards program to better understand how you earn rewards and how you can redeem them.
Whether it’s free travel, travel upgrades or cash back, rewards can often outweigh the cost of the annual fee that most rewards cards have.
For example, my wife and I used our Delta Air Lines points to cover the cost of our plane tickets for a vacation in Aruba, then used our Platinum Medallion status to get us a better baggage allowance, Comfort Plus seating on the aircraft and a hot breakfast at the airport.
Had we not understood how to use our points effectively, we would have paid for these expenses out of our own pockets.
Understanding the rewards program is half the battle, as we were able to strategize to further utilize points on our trip using our American Express card, which we used to cover our hotel stay, breakfast each morning, a spa visit, discounted beach hut rental and an additional $50 credit on our American Express bill.
Choosing the right rewards card
If you don’t have a rewards card, shop around for one from which you’ll get the most benefit. Start with cards offering perks you know you’ll use.
For example, if you take frequent trips to visit family and typically use the same airline, you might want to start with a rewards card that is specific to that airline or at least to travel.
Likewise, if you have a cause that’s near and dear to your heart, you might want to investigate a card that gives rewards in the form of charitable donations.
Even if you’re getting fantastic rewards, you should still consider the card’s terms and conditions. Will you earn enough rewards to justify the annual fee? If the fee exceeds the perks you’ll receive, or if the interest rate is significantly higher than what other cards offer, it might not be worth it overall.
If you already have credit cards with rewards, examine how you might combine or transfer your rewards as I did for my family’s trip to Aruba to get all available benefits.
According to the Consumer Financial Protection Bureau, billions of dollars of credit card rewards go unused annually, demonstrating how important it is to understand and utilize your rewards instead of allowing them to expire.
Rewards are a perk, not a purpose
Research suggests that people tend to spend more when using credit cards but adding reward points to the mix makes some people spend more to earn more.
A Bankrate survey revealed that around 70% of credit cardholders carrying a balance continue to use the card in an effort to earn more rewards. Even though they’re paying interest charges, they continue to add to the balance, because they’re trying to rack up more points or cash back.
Notably, that same survey revealed that more than half of credit cardholders carrying a balance say that it’s become harder to pay off credit card debt in the last year.
Functional magnetic resonance (fMRI) studies conducted by MIT Sloan further revealed that credit cards exploit the reward networks in the brain, providing a signal of pleasure when purchases are made using a card.
Combine that with the gamification of cards through earning or unlocking rewards, and it’s easy to see how reward programs might encourage people to spend more than they should.
To be clear, when I talk about using credit card rewards to earn perks such as free travel, I’m not talking to cardholders who struggle to make their monthly payments.
I suggest taking advantage of credit card rewards if you successfully manage your cards and would like to get something extra out of your usage.
Use credit card reward programs as a tool to earn the perks you want, not as a justification to spend more.
