This article was updated on June 25, 2018.
Americans plan to spend an average of $660 on gifts this holiday season, according to NerdWallet's 2017 Consumer Holiday Shopping Report. Given that almost half of Americans say they wouldn't be able to come up with $400 in an emergency, that's not an insignificant sum.
It's not surprising, then, that according to NerdWallet's survey, less than half of Americans were able to pay off the debts incurred from Christmas shopping in 2016 right away. Instead, most consumers took several months to pay off their holiday shopping sprees, and sadly, nearly 15% still haven't retired those debts.
I struggled with holiday spending for years, even after I discovered the magical, almost life-changing effects of budgeting. As a father of four, I found that buying presents took up a large chunk of my wallet every December, but I could never decide on the best way to pay for it. It was just hard for me to set aside a little each month for one big annual expense at the end of the year. Even on a semi-strict budget, it simply didn't work for me to have that extra money sloshing around in my checking account. I also didn't want a million extra mini-savings accounts, one for each itemized annual expense like family vacations, home-improvement projects, and, yes, Christmas shopping. While I hadn't paid interest on credit card debt in years, I often found myself dipping into emergency savings in January to pay off my December gift-buying binges.
Then, one day, my wife and I had an epiphany. While discussing whether we wanted to cash out a particular card's rewards to make a purchase, we began to question whether we were maximizing the rewards we were getting from our cards. It was something neither of us had put a lot of thought into before, and with just a preliminary amount of research, we discovered we could be getting back more. As we researched further, we discussed what we should use credit card rewards for, and after a spirited debate, we reached a consensus: Christmas shopping!
Maximize your rewards
My wife and I aren't big spenders, and we're able to save a fair percentage of our salaries. But we do have four school-age children, and as all parents know, kids are awfully expensive these days. We're definitely not immune to feeling pressure on our wallets every Christmas. But through careful planning, we will be able to redeem a little more than $1,200 in credit card rewards this December. That takes a huge bite out of the financial pain the holiday season can cause.
Before I talk about my specific strategy, however, I think it's important to say that you shouldn't just copy what I do. Everybody will have different spending habits, meaning different tactics to optimize card rewards might be called for. It's important, therefore, to set aside a couple of hours to explore your options carefully. To help you get started in this process, The Motley Fool website has plenty of free research resources available.
For people who like to travel, for instance, cards that return the most flight miles or hotel rewards might be the best bet. For someone who's in a car all day, cards that offer points for gas purchases could be the way to go. For me and my wife, we quickly determined the best thing we could get in return was either cash back or points we could redeem for money off our statement. After looking over our monthly expenses, it didn't take us long to figure out that the two largest expenses we could exploit for rewards were our grocery and gas spending. The retailer we spent the most at was Amazon.com, Inc. (NASDAQ: AMZN).
My family's path to $1,200 in annual credit card rewards
After doing our research, my wife and I came up with a list of the best credit cards that suited our needs and a plan to use them throughout the year. One of our primary goals was to never earn just 1% cash back on any purchase, ever. Over the next year, we slowly rotated into these cards. Some of these cards involved opening new accounts and others just a renewed look at optimizing an existing account's use. (Be aware that opening new credit card accounts can affect your credit score.) In alphabetical order, here are the cards we currently use:
Amazon Prime Store Card: This card can only be used on Amazon's website and is only available to Prime members. That said, it was an easy decision for us, given how much we spend on Amazon. The card gives 5% back for all purchases made on Amazon.
American Express Blue Cash Preferred® Card: Though this card comes with a modest annual fee of $95, there is a $150 bonus for spending $1,000 in the first six months. What makes this card worthwhile for families is that it gives 6% back on groceries and 3% back on gas. There is a cap on groceries of $6,000 for the year, though.
Chase Freedom®: With this card, there is no annual fee and a $150 bonus for new card members when they spend $500 in the first three months. However, my wife and I chose this card for its rotating 5% cash back on different categories by quarter. While it changes a little each year, since we've had the card there has always been a quarter for redeeming 5% cash back in groceries, gas, and restaurants. (There is, however, a $1,500 spending cap on receiving 5% back each quarter.) So for us, between this and our American Express card, we get 5%-6% back on groceries all year round.
Citi® Double Cash Card: The wonderful thing about this card is that you earn 2% back on all purchases. That's 2% back when we paid someone to paint the house and 2% back when we bought a new air-conditioning unit and 2% back on all other home-improvement projects. It's even 2% back on monthly expenses like cable, school activity fees, and cell-phone bills.
This strategy might not be for everyone. For those with substantial credit card debt, the focus should be on using cards with low interest rates. For those who are single or who have smaller families, Christmas gift spending might not need to be prioritized. But conscientiously using these cards throughout the year let us accrue $1,200 in rewards that will be redeemed in late December -- which makes a real difference in how our family celebrates the season.