Updated: Aug 6, 2019
For financial security and stability, creating a solid emergency fund is the most important thing you can do. Coming in a close second is managing your monthly expenses. There are many schools of thought on how you should pay for your expenses, whether it be with cash, check, debit card, or credit card. There are pros and cons to each, and only you can decide which is best for you. If you are currently in credit card debt, read no further - cut up your credit cards and start paying off your debt. Credit cards are financially ruinous if used incorrectly thanks to their incredibly high interest rates, so you should never carry a balance from month to month.
If you are free of credit card debt and are able to control your spending, credit cards can be a convenient and rewarding method of payment. Credit cards are easier to carry than cash, you can pay the exact amount so you don’t have to carry around change, they can easily be replaced for free if lost or stolen, they have fraud protection so your money isn't missing from your bank account until the fraud is resolved, and they come with several perks, including cash back, travel protection, car rental insurance, and purchase protection. If you are fiscally responsible, don’t buy more than you can afford, and pay off your credit card balance every month, the credit card perks can put a little extra money back into your pocket. Last year, my family earned $855 in cashback on $26,000 in purchases using our credit cards, averaging approximately 3% cashback on every purchase we made.
There are a lot of credit cards out there that offer 1%-1.5% cash back on every purchase. These are great if you only want one credit card or can only get approved for one card. However, many credit cards offer cash back up to 5% on certain categories of purchases. Some credit cards will rotate these categories quarterly, while these categories are static for others. Choosing credit cards that give bonus cash back on categories that match your spending is the key to maximizing your earnings. Take a close look at your monthly budget and identify the categories on which you spend the most money. For my family, we spend most of our budget on groceries and gas. I also discovered that we purchase a lot of household items from Amazon. I focused my research on finding cards that offered as much cash back as possible in these areas without having to pay an annual fee.
Here are the credit cards we use to maximize our cash back. Note that this is what we found works for our situation and spending - your situation and monthly budget is likely different. So if you are unsure if these cards are right for you, consult a financial advisor.
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Groceries. For groceries, I found that the best rewards credit card is the American Express Blue Everyday Card. It offers 3% cashback on groceries up to $6000 annually for supermarkets in the United States. Unfortunately, it only offers 1% on superstore, convenience store, or warehouse club purchases. My wife and I spent $3200 last year on groceries, which equates to $95 in cash rewards. This card also has many special offers in which you can earn even more cash back if you make purchases at specific retailers, including hotels.
Gas. The Bank of America Cash Rewards Credit Card is my go-to card for cashback on gas, as it offers 3% cashback on gas on the first $2500 in combined grocery, wholesale club, and gas purchases per quarter. It also couples nicely with the American Express Blue Everyday Card because it offers 2% cash back at superstores, convenience stores, or warehouse clubs. So this card makes sense if you have long commutes or drive a lot, or shop a lot a warehouse clubs or superstores. My family spent $2200 on gas and $1400 at superstores and warehouse clubs last year, resulting in $95 in cash rewards. Like the American Express Blue Everyday Card, it also offers additional cashback at specific retailers tailored to your spending habits. For me, I regularly get 5%-10% cashback at auto parts stores, restaurants, and hotels, which is great when I’m on reimbursable business travel. However, you do have to log in to your account and add each offer to your card in order to receive the rewards. In the past year, in addition to the regular cash back on purchases, I earned $100 cashback when we purchased a new washer and dryer, $70 cashback for a reimbursable hotel stay and car rental while on business travel.
Household items. If you are an Amazon Prime Member and buy a lot of stuff from Amazon like I do, the Amazon Prime Rewards Visa Signature Card offers 5% cash back on all Amazon and Whole Foods purchases. It also offers 2% back on restaurants. The cash rewards can be applied to future purchases at checkout, so I regularly get items for free from Amazon based on my other spending. Last year I spent $2200 on Amazon and at restaurants using this card, resulting in $80 in cash rewards.Occasionally, the card also offers 5% cash back on other categories, such as utilities and insurance, for a short period of time. I made all of my car insurance, health insurance, and phone bill payments using that card during that promotional period and earned $75 cash back just for that.
Everything else. The Citi Double Cash Credit Card offers 1% on all purchases, but also 1% on all payments, so you’re essentially getting 2% cash back on everything you buy, which beats most other credit cards offering 1.5% cashback on everything. Since you get rewards for paying your credit card bill, this card promotes healthy credit card use. This is my “everything else” card, or the card I use for purchases that aren’t for groceries, gas, warehouse stores, superstores, or restaurants. Last year, I spent $17,000 using this card, resulting in $340 in cash back. Another perk I really like is Price Rewind - if you purchase an item using this credit card but find a cheaper advertised price for the same item elsewhere within 14 days, Citi will refund you the difference, provided you submit documentation (your purchase receipt and a flyer or advertisement promoting the lower price. When I bought a Cub Cadet lawn tractor, it ended up being discounted $250 one week later. I made a refund request through the Price Rewind tool, and Citi refunded me $250. It was incredibly easy!
Thus, my wife and I earned $855 in cash back (not including the $250 in refunds) in the last 12 months on $26,000 in purchases that we would have made regardless of whether we paid with credit card or cash. That comes out to a 3.3% cash back on every purchase, more than double what is offered by most credit cards giving 1.5% cash back! If you are a typical American family with an annual income of $60,000, $855 equates to 1.4% of your annual income. That’s pretty significant! It’s like giving yourself a cost-of-living raise!
Obviously, there are other credit cards out there that may give you more cash back based on your unique spending habits, so do some research yourself. I personally don’t use them, but travel reward credit cards are great options if you travel a lot for work or leisure. These will give you points which you can redeem for discounts on airfare and hotels. I recommend choosing a credit card that’s offered by the hotel or airline that you use frequently, as they often give you additional bonus points when you use your card to make purchases from them.
Also keep in mind that many credit cards offer sign-up bonuses, such as $300 extra in rewards if you spend $1000 in your first 3 months. Take advantage of these offers if possible. To make sure you can earn these bonuses without spending more than you can afford, only sign up for one credit card at a time. Also keep in mind that applying for credit cards will impact your credit score, so take a close look at your particular situation or talk to a financial advisor to see if opening several new credit card accounts will have a significant negative impact on your credit.