by Lyle Daly | Sept. 4, 2020
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Want to potentially earn hundreds more in credit card rewards each year? Your budget could be your secret weapon.
When you're shopping for a new credit card, one of the most important features is the rewards rates different cards are offering. You can find cards with all sorts of bonus categories, such as dining, air travel, hotels, grocery stores, and even streaming services. There are also credit cards that earn the same flat rate on every purchase.
Some consumers just take a shot in the dark here. They open credit cards offering bonus categories that seem good at a glance, without considering how those categories match up to their own spending habits. If you do this, you could end up leaving a lot of money on the table.
A better approach is to use a budget to pick the credit card that will earn you the most back. It doesn't take long, and it's a decision that can pay off every time you use your card.
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The first step is to make a detailed budget with expenses broken down into spending categories. You can use a monthly or yearly budget, but make sure it reflects all your expenses, not just the ones you have every month. It's essential to get accurate numbers for purchases you make only a few times per year, such as air travel.
Besides a budget, you'll need a calculator, a list of rewards credit cards you're considering, and the rewards rates for those cards.
For each credit card on your list, you're going to calculate the amount of rewards you would earn with it. After that, you can compare these amounts to see which card offers the most value.
Here's how to calculate the rewards you'd earn using a credit card:
Let's say you're looking at a credit card that offers 3% cash back on groceries, 2% on gas, and 1% on all other spending. You look at your budget and see that you spend $600 per month on groceries, $400 per month on gas, and $500 per month on everything else. With that card, here's how much cash back you'd earn by category:
Maybe another card earns 3% on dining and travel and 1% on all other purchases. After checking your budget again, you find that you spend $200 per month on dining, $100 per month on travel, and $1,200 on the rest of your purchases. You'd earn:
By choosing the first card instead of the second, you'd earn an additional $120 per year.
Remember to check for any spending caps on a credit card's bonus categories. For example, you find a card that earns 3% back on the first $5,000 per year in grocery purchases and 1% back once you've exceeded that limit. If you spend more than $5,000 per year on groceries, then you need to take that into account when you do the math.
If a credit card has an annual fee, you can subtract that amount from the total cash back the card would earn per year. This makes it easy to compare the value of no-annual-fee credit cards with cards you need to pay for.
This method isn't always perfect. It works much better with cash back credit cards than travel credit cards, since travel points can vary in value depending on a card's rewards program. If you're calculating the value you'll get from a travel rewards card, then you'll need to estimate how much its points are worth. You may want to consider additional credit card features that add to their value, such as spending credits for certain types of purchases or purchase protections.
But even if purchase rewards aren't the only feature you look at, they're usually among the most valuable credit card perks. When you know how much you'll earn in rewards with all the cards on your list, it can be a huge help in picking the right one.
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