When you go to the gas station, what's the best credit card to use? How about when you stay at a hotel? Even if all of your credit cards have reward programs, you may be surprised at the long-term difference using the right credit cards for the right purchases can make. Let's go over some of the big benefits of using the right card and one way to make the decision much easier.
Different credit cards make sense for different purchases
As an example, consider the four credit cards that are sitting in my wallet as I write this:
- Capital One Venture Rewards -- 2% back on all purchases
- American Express Delta SkyMiles Platinum -- One mile per dollar on all purchases, two miles per dollar on Delta purchases.
- Chase Freedom -- 1% back on most purchases, 5% back in rotating categories. Currently, the 5% cash back categories are department stores, wholesale clubs, and drug stores.
- American Express Starwood Preferred Guest Card -- One Starpoint per dollar on general purchases, two Starpoints per dollar at SPG hotels, and three if you have elite status.
In this case, my go-to credit card is the Capital One, as it has the best general rewards rate. However, when I travel, it's a much better deal to charge my airline and hotel purchases on the two Amex cards, as the value of Delta Sky Miles and SPG Starpoints are significantly more than one cent apiece. Additionally, when I do my every-few-weeks trip to Costco, it makes the most sense to put the purchases on my Chase Freedom.
It can be difficult to keep track
The problem many people run into is keeping track of which card is best to use for which type of purchase at any given time. This can be especially difficult if your cards have rotating reward categories.
One solution that may work for you is an app from Wallaby Financial, a subsidiary of Bankrate (NYSE: RATE). Not only does the app keep track of your reward rates, but it also takes other factors into account, such as interest-rate differences and fees, in order to tell you the best card to use at any time. Wallaby can also tell you the best card to use at individual retailers, or when you're shopping online.
The company maintains a database of about 3,200 credit cards from 600 financial institutions, so all of your credit cards are most likely compatible.
Over time, the app can even tell you how many rewards you've accumulated and how much you've missed out on by using the wrong card. In addition, the app monitors your linked credit card accounts for suspicious activity and fee increases. In other words, it's intended to help you keep track of all of your credit card accounts in one place.
In addition, Wallaby can also analyze your actual spending data and suggest the best card to get next based on your estimated reward potential.
Look at the big picture as well
When selecting a credit card, rewards are important, but it's important to mention that they are just one piece of the puzzle. According to Matthew Goldman, founder and CEO of Wallaby, there are three main things to look for when selecting a new credit card:
- Reward potential. This is what we've been talking about, and it's important to keep in mind that your spending habits (and therefore your ideal rewards cards) can change over time. "For example, if you have a child, you may start spending more money on groceries, so it might be a good idea to get a credit card that rewards grocery spending," says Goldman.
- Fees. This category includes any annual fees and interest charges. Annual fees can be well worth it if the perks and rewards of the card justify them. And interest rates can vary significantly among credit cards, even for someone with an excellent credit rating.
- Amenities value. In addition to rewards, many credit cards offer additional perks. For example, the American Express Delta Platinum Sky Miles card offers free checked bags, which saves me $50 per round-trip flight, as well as a companion certificate each year (essentially a "buy one, get one free" airline ticket). These benefits alone more than justify the $195 annual fee I pay.
Maximizing rewards only makes sense if...
As a final thought, playing the credit card rewards game only makes sense if you're smart about your card usage. Carrying large credit card balances for the sole purpose of getting rewards is a bad financial decision. In a matter of a month or two, the interest charges you accumulate can easily add up to more than the value of your rewards.
In other words, the No. 1 way to maximize your credit card rewards is to pay off your charges as soon as possible and avoid carrying balances. That's the best way to actually make money from your credit cards.