Maxing Out on Credit Card Reward Cash

I’ve always been a big fan of credit cards that pay cash rewards.  Pay the balance off in full each month, collect the free money – what’s not to like?  I started out in the early 90s with a Discover card, which was one of the first to offer cash back rewards.  Then in 2004, I switched to the American Express Blue Cash card.  Up to now, the Amex has been my main credit card except for places that don’t accept it.

Both Amex and Discover have “tiered” cash back programs.  The cash reward is a percentage of overall spending, and for both these cards, it’s a very small percentage until you meet a preset spending tier.  Then it increases.  Amex also pays a greater percentage back for certain purchase categories that Amex deems “every day purchases,” like grocery and drug stores.  Specifically, Amex pays 1% back for “every day purchases” and 0.5% for everything else until I reach $6500 in purchases.  Then it jumps to 5% for “every day” and 1.25% for everything else.  But what really matters is the bottom line: how much cash back do I earn in a given year vs. what I spend on the card?  With Amex, it typically works out to around 1.5%.  This will be different for different people; in particular, the more you spend in a year, the higher the percentage will go, particularly if a lot of the purchases fall into the “every day” category that earns 5%.  But in my case, the bottom line has hovered around 1.5% every year.

I’m always looking for a better deal, which means that if I can find a card that nets better than 1.5%, I’m going to check it out.  A few months back I read about the Schwab “Invest First” Signature Visa, which pays unlimited 2% cash back, so I signed up for the Invest First card and will now be using that instead of the Amex.

But there’s still more.  It turns out that my old Discover card, which I haven’t used in 5 years, has a 5% cash back program where certain purchase categories earn 5% back on up to $400 in purchases.  The categories change every 3 months, but as long as I stay on top of things, I can earn even more cash back by strategically using my Discover card.  With the combination of that and the Schwab card, my annual cash rewards should exceed 2% of purchases.

The bottom line:

  • Look for cards that pay cash rewards with no annual fee
  • Pay card balances off in full every month to avoid finance charges
  • After each year, figure out the “bottom line” percentage of cash back earned vs. total spent, and choose the card(s) that maximize that percentage for your own individual spending habits

I’m sure I’m not the most popular guy with the credit card companies, but as long as they keep offering the rewards, there’s no reason not to take advantage of them.