Credit Cards

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There are literally hundreds of credit card products to choose from that offer a variety of perks and rewards. If you play the game right, you can actually come out ahead and effectively make the credit card companies pay you for the privilege of having you as a customer.

If you want to master the rewards credit card game, here are five rules you have to follow.

1. First, make sure you'll actually use the rewards -- This sounds obvious, but it's worth mentioning. You may be surprised how many consumers have credit cards with travel rewards (like frequent flyer miles) that rarely, if ever, travel. If you don't travel, your best bet is probably a standard cash back card, no matter how much of a good value the travel card may seem to be.

2. Crunch the numbers -- In order for a rewards card to make sense, the value of the benefits you receive need to be greater than the cost of being a card member. For example, if a card comes with a $100 annual fee and you earn rewards worth $200, it could be well worth the cost. Make sure you're aware of any annual fee associated with the card, and take it into account when making your decision.

3. Don't spend just to get rewards -- This is one of the potential pitfalls of the rewards card game, and it is one that the credit card companies are counting on you to do. Don't buy things you don't really need simply because you'll get some frequent flyer miles out of the deal. Cards should be used as a cash alternative, and not treated as extra money.

4. Don't open and close cards too often -- By all means, if you have a credit card that no longer makes sense for you, go ahead and close the account. However, one misguided strategy is to apply for three or four credit cards at the same time to take advantage of lucrative sign-up bonuses, and then close the accounts just a few months later.

The problem with this is that it can hurt your credit score, making it more difficult to take advantage of excellent rewards offers in the future. "Length of credit history" makes up 15% of your FICO credit score, which takes into account the ages of your accounts and the average age of all of your accounts, among other things. As you can imagine, if you're constantly opening and closing accounts, this category doesn't look too good.

An additional 10% of your score comes from "new credit," and applying for and opening too many new credit accounts in a short time period can hurt this part of your score.

5. Never carry a balance -- Last but certainly not least, this is the central concept of the rewards card game. If you carry a balance on your cards, it defeats the purpose of earning rewards in the first place.

For example, let's say that you spend $5,000 on your travel credit card, and that you receive 5,000 frequent flyer miles which are worth about $50, depending on who you ask. Well, if your card has an APR of 17%, it'll cost you about $71 per month in interest just to maintain your debt -- more than the rewards are even worth.

If you want credit cards to work in your favor, it's important to only charge what you're able to pay back before your statement is due. Otherwise, the credit card companies are winning the game.

An example
As a personal example, I carry the American Express Platinum Delta SkyMiles card in my wallet. I have several different rewards cards, most of which I opened for specific purposes (such as an Amazon.com Visa card that offers excellent rewards on Amazon purchases), but my Delta-branded American Express is my go-to credit card for everyday use. Let's take a look at how it fits into the rules I listed above.

First, I use an airline card as my go-to because I love to travel, so it makes sense for my situation. Crunching the numbers, the card comes with a relatively high $195 annual fee, but also has the following perks (to name a few):

  • Free bags on Delta flights for me and up to eight other people on my reservation
  • A free companion ticket once a year -- essentially a "buy one get one free" flight
  • The ability to earn elite status miles after meeting spending thresholds
  • Priority boarding
  • Of course, Delta miles for every purchase (double miles on Delta purchases)

Here's how it adds up for me. My wife and I average about four round-trip flights per year, and since the free bags perk is worth $25 each way, this perk alone is worth $400 per year and more than justifies the card. We always use the companion ticket for one of our cross-country flights, and it generally gets us a $500 flight for free. So, we're at $900 per year in value, and that's not including the miles I earn or the 50,000 miles I originally earned as a sign-up bonus.

I only use the card for purchases I would make anyway, and plan to keep the account open for years as long as the perks and fees don't change much.

Credit can be Foolish
As long as you have the discipline to use your rewards cards responsibly, and have determined that the cards' benefits outweigh the costs, it is entirely possible to actually profit at the expense of the credit card companies.

Matthew Frankel owns shares of American Express, which the Motley Fool also owns and recommends. The Motley Fool owns shares of and recommends Amazon.com and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.