The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.
Rule #17: The best credit card is a no-fee rewards credit card that you pay in full every month. But if you carry a balance, high interest rates will wipe out the benefits.
This rule is absolutely correct in that you should be using a rewards card with no fees and you should be paying off the balance every month. There’s pretty much no other way to use credit cards without a significant loss.
However, this rule is not quite specific enough. It ignores the fact that many rewards cards are just not all that rewarding. The offers sound pleasant, but often you earn 1% or less return on the rewards and many rewards programs are nearly useless for the vast majority of users.
The fact of the matter is you should expect at least a 1.5% reward in a form that you will actually use. If you’re getting below that, I can virtually guarantee that there are better rewards programs out there for you.
I usually use the CitiBank Driver’s Edge Platinum Select card as a baseline for my rewards card comparisons. You earn a 6% rebate on supermarket, drugstore, and gas station purchases in the first year (3% after that), and 1% on all other purchases, plus a $1 rebate on every 100 miles you drive (which you prove using maintenance receipts). These rebates aren’t directly in the form of cash, but are used when you do maintenance, service, or repair on the vehicle assigned to the card. You can also get the rebate if you buy a new car in the next five years. In short, if you perform regular maintenance on your car or acquire a new one, this card will pay for a solid portion of it.
If a credit card offer can’t exceed this one (and not many can), you shouldn’t be using that reward program. Let’s rewrite that rule.
Rewritten Rule #17: The best credit card is a no-fee rewards card that can earn you at least 1.5% in return that you pay in full every month. But if you carry a balance, high interest rates will wipe out the benefits.