Optimizing Your Credit Cards

I have to admit something to you. I have a love/hate relationship with credit cards. There have been years where I have sworn them off, and there have been years where I sing their praises. Not surprisingly, most financial experts (and parents) have a visceral reaction to credit cards. “Cut them all up!” or ” I love them! It’s how I paid for my flight to Argentina last spring!” The truth probably lies somewhere in between both those extremes.

Having conducted several experiments on myself and my clients, my initial hypothesis proved to be right- to an extent. The truth is, there are several amazing deals on the market that you really shouldn’t pass up  (pro-tip: they’re not the offers you’re getting in your mailbox- which you can opt out of here).  Deals like free flights to England once you make your first purchase and Easy-as-Pie travel credits on any travel related purchases.

Do the Math

The truth lies in the math. If there is a huge sign-up bonus associated with a credit card, it might be worth pursuing.

Side note: I don’t really use cash rewards cards because I find the bonuses are much smaller and also I’m a big fan of traveling (really who isn’t?). I’m sure there are a ton of great offers, but I won’t recommend something to you, I don’t use myself.

The travel rewards cards I currently use are:

Starwoods Preferred American Express (for hotels)

This card is an absolute no brainer for getting free nights at some of the best hotels in the world. If you love to travel and hate shelling out cash every night you’re abroad, this card gives you a monster sign-up bonus of 10,000 points after you make your first purchase and an additional 15,000 points when you spend $5,000 within your first 6 months.* This is enough points for 6 nights at multiple 3 star hotels worldwide. Alternatively, if you really want to pamper yourself, you can use the free points for two free nights at the W Boston or Westin St. Francis in San Francisco (the nicer hotels require a two night minimum stay). Not a bad deal for doing little more than filling out an application.

It does have a $65 annual fee that is waived for the first year. Even if you keep this card for 4 years, the $195 you spend will be way less than even one night at the W. They also give you a laughable opening credit limit when you first open the card. This can get annoying as you’ll need to pay off the card multiple times in one month to stay under limit, but if you call back in 90 days after you open the card, they should triple it.

British Airways Visa Signature Card (for flights)

Going to Europe is expensive. Never mind the wild fluctuations of the Euro or expensive Parisian cafes, flying there is expensive. This is why I love the British Airways Visa Signature Card. You get 50,000 points upon your first purchase with the card, and 25,000 additional points for each additional $10,000 you spend your first year for up to an additional 50,000 points. This brings your grand total sign-up bonus potential to 100,000 points!

As of today* a flight from NY to London economy class costs 20,000 points or 40,000 points for business class. So even if you settle for the 50,000 sign-up bonus and don’t spend another dime, you’ve essentially secured a free business class flight from the States to London. Like I said- not a bad deal for doing little more than filling out an application. But don’t take my word for it, calculate how many points you would need to secure your free flight here.

It is a great deal, but be warned there is a $95 annual fee and it is not waived the first year meaning you will get a nice surprise your first bill if you’re not ready for it. Regardless, EUROPE!!

For the Credit Score Challenged

Like all good credit cards, you do need a solid income and decent credit score to get approved for these cards. If you’re still building your credit, don’t fret- there’s an awesome card available for you. It is actually my favorite card that I used while I was building my own credit, and one of the easiest cards to redeem your rewards from. This card is the Discover Miles Rewards Card

Discover Miles Rewards Card

This card gives you 1,000 points every month you make a purchase during your first year of membership for a total of 12,000 points.* You can redeem these points for cash, gift cards, or my personal favorite-travel credit. Book a hotel, rent a car, go on a cruise, anything travel related and redeem 10,000 points for $100 travel credit instantly credited to your account. Super easy. I loved this card in college, and still think it’s a great entry-level card for those wishing to take advantage of travel savings.

*Deals Checked as of 06.16.12

I Have My Travel Card, What Next?

Unless you’re very financially disciplined, after you’ve secured your bonus, either move on to another card or switch back to debit. That’s right. Stop using your credit card.

“But Ayman! What about my 5%, Double Mileage, Triple Rewards on all Latte Purchases, bro!”

Hold on one second muchacho.

If you’ve ever been on a cruise, you know one of the first things they do is give you your personalized cruise card. This cruise card functions as both your room key and electronic credit card to purchase anything on the cruise. So drinks, excursions (think snorkeling), and the like are all put on your cruise card and then the bill is sent directly to your room at the end of the weekend. It’s super convenient, and really adds to the island vibe to not have to carry around less else other than this card the entire weekend. But convenience is not why the cruise lines implement this system.

it psychologically separates you from your money. You’re no longer forking over $20 for a Miami Vice Piña Collada, you’re putting it on your card. MIT discovered that using cash, or even debit cards, activate the pain receptors in our brain. They also discovered that Credit Cards/Cruise Cards/Rewards Cards do not. Our brain does not equate purchases on credit cards with the financial impact it causes us. Consequently we end up spending more. This separation of cash and emotion is also why vegas uses poker chips instead of splashing the pot with “Big Face Hundies.” (those are Hundred Dollar Bills for my melaninly challenged brethren).

In fact, McDonalds didn’t approve the use of credit cards in their store until 2004, years after credit cards became popular, because they didn’t want to fork over the fees. Once they conducted their own research they suddenly changed their tune.

When McDonald’s started allowing credit card purchases, the average purchase went from $4.50 up to $7.00. That’s a huge increase.

 Sneaky sneaky.

Rewards programs further exacerbate the problem. Every rewards card also has additional ways to accumulate points either via “1 point for every $1 you spend” or “Triple Points for All Gas Purchases.” These deals are extremely attractive and it’s easy to rationalize putting everything on your credit card and paying it off in full at the end of every month to maximize your points accumulation.

I’m spending the money anyway, might as well get something for it.

When you do the math, most points equate to approximately 1-3% reward. Outside of the huge signing bonus (which is well worth it), the 1-2% additional rewards incentives are simply a fools game.

But don’t take my word for it. Track your spending using Mint.com for two months- one month use your credit card, the next use your debit card. Tell me which month you’re more disciplined.

Pro Tip: If you’re want to take it to the next level, you can use the extra savings to create your own rewards program. Send your savings directly to your ING Savings Account Travel Account. Last time I checked, cash has no black-out-dates.

 

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