Ask a Trainer: How can I decide which type of reward credit card is most valuable for me?

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Although it can seem counterintuitive at times, having and using credit cards are essential parts of optimal financial wellness. Not only do credit cards provide us with a temporary safety net if we need cash in a pinch, but in a lot of cases they are non-negotiable forms of currency, such as when we need to rent a car or leave a deposit on a hotel room. Plus, once we move on to increasingly more adult transactions, like renting an apartment or buying a home, a long and strong credit history is hard to come by if we haven’t established and wisely used credit lines in the past.

It’s true that any of our Certified Financial Trainers will tell you that there are times when it makes sense to go on a cash diet. If you are struggling to live within your means or committed to sticking to a budget to reach a financial goal, using your debit card for all of your daily spending is a great way to make sure you don’t get tempted to reach into future paychecks to satisfy today’s desires. But once you’ve mastered your basic budget, congrats! You’ve graduated into the world of strategically using credit cards to your advantage.

Credit cards can provide a number of things that cash cannot: fraud protection, extended warranties on goods, and insurance against damage or theft, to name a few. Those are valuable perks and can save you money and headaches in the long run.

Equally powerful are the rewards that credit cards offer. Banking institutions want your brand loyalty, and they are willing to pay for it quite generously. These loyalty programs typically pay out in 3 different forms: cash back, travel rewards, and helping you to invest effortlessly in small amounts over time. Whichever type of card you choose, the means of earning rewards is the same: you make purchases with the card, and then you get a percentage of the purchase price back in the form of cash, points, or incremental investments. These all sound like no brainers, but it is important to carefully consider which cards work best for you and your spending habits.

Here is a breakdown of how these rewards systems work and some ways to figure out which is the best choice for your situation. Once you have a better idea of where you’ll get your highest ROI, you can check out a resource like Card Match Tool to apply and start earning.

Cash back Credit Cards

Cash back credit cards are pretty self explanatory. You use your card when you shop, and you get a percentage, usually 1% to 2% per dollar spent. Depending on the card, you might also have bonus categories that help you to earn more points on items that you purchase more frequently. For instance, some cards offer up to 6% cash back on groceries or 3% back on gas. 

Travel Rewards Cards

Travel cards incentivize spending on travel and reward you in one of 3 ways: through airline miles, hotel points, or a generic currency that can be used to pay for a broad assortment of travel needs, including Airbnbs or rental cars. Some carry with them additional perks like statement credits to cover signing up for TSA pre check or primary insurance when you rent a car. They might also offer things like trip protection or travel insurance, which can help you to reduce your travel costs in other ways. Still others provide access to perks that can enhance your travel experiences in other ways, like giving you passes to airport lounges or free upgrades to fancier rooms at your favorite hotels.

Brokerage Cards

Although there are fewer cards available that incentivize investing, they are worth a look because they can be a smart and easy way to build up your portfolio. Brokerage cards technically give you cash back, typically 1-2%, but instead of coming in the form of cash that you can stash in your bank account or use to pay off credit card bills, you get a slow trickle of money into your brokerage account, which will be invested incrementally over time and grow for you in the future.

These all sound great, right? We agree. However, you’ll want to choose wisely to get the most bang for your buck. While it might sound great to have all 3 types of cards, if you are a relatively frugal person, you might find that your earnings on each type of card don’t add up very fast. This can be a bit disappointing in the case of travel cards, particularly if you aren’t able to earn enough points to cover your travel needs in a reasonable amount of time. In other cases, you might find that earning in cash back form isn’t as valuable to you as earning in travel points, since cashback typically pays out at a 1:1 rate versus, travel points that can be worth more when converted into airline miles. 

In order to figure out which is the best type of card for you, you should ask yourself the following questions:

Where do you do most of your spending?

If most of your spending is on day to day items like groceries, household goods, gas, and basic needs, chances are you might find the highest earning potential on cash back cards.

Do you have a need for the kind of points the card earns?

Those of us who have gone down the points and miles rabbit hole have run some numbers that show that, if you have the time to learn the rules of the game, travel rewards are more valuable than cash. For instance, 30,000 points on a cash back card is typically worth $300, while 30,000 points on some travel rewards cards can buy you a hotel room valued at $600 or more. Still, be realistic with yourself. If we don’t see ourselves traveling soon or if we don’t have flexibility to use our points when there is award availability, a bird in the hand might be better than 2 in the bush.

Do you have the bandwidth to learn the ropes of rewards programs?

The people who get the most out of rewards programs devote time to learning about them. There are better ways to earn, more lucrative ways to use points, and a never ending blogosphere of points enthusiasts who find and share sweet spots that can multiply the value of the points you’ve earned. If you follow this news, it can really pay off, but if that doesn’t sound like a fun hobby to you, you might want to stick to something easier, like set it and forget it investing.

Once you’ve figured out which card is right for you, it’s time to see which cards are currently on the market and which offer the highest sign on bonuses. For this, Card Match Tool is handy because you can see which cards you are pre-approved for without a hard pull on your credit, and assess the offers once you’ve answered the questions above.