Using Credit Card Rewards Effectively

Credit cards with strong rewards programs can be an incredibly powerful financial tool, but they can also be a double-edged sword. While they can help your financial state if used properly, the rewards can easily end up going to waste and the credit cards themselves can be problematic.

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Here are some strategies to use to get the maximum value out of credit card rewards.

Credit cards are only useful if you’re financially stable enough to pay off the balance in full each month.

If you consistently carry a balance on your credit card, the interest you pay on that debt is far more costly than the benefits you’ll get from credit card rewards. Most credit cards have interest rates varying from 15% to 33%, while even the best rewards programs return 5% value to the user (and even then, only under perfect circumstances).

If you consistently carry a balance on your credit card, step back for a while and switch to living off of your cash on hand with a debit card until you get that balance paid off. Continuing to use that credit card for the rewards is costing you more than you’re earning in rewards.

The only truly healthy way to use a credit card is to pay off the balance in full every month. If you do that, then the rewards are a bonus. If you’re not paying off your card every month, the rewards are costing you more than you’re earning from them.

Look at credit card rewards as a tool to improve your financial situation, not as “fun money.”

No matter what kind of rewards you’re earning, look at credit card rewards as a tool to improve your financial situation rather than as “fun money” to spend on frivolous things.

For example, let’s say you use an Amazon Visa card, which offers rewards in the form of credits on If you earn $30 a month in Amazon credit by using that card (while paying off your balance in full), then you’re doing well. However, you can use that Amazon credit to stock up on household supplies or buy a gift you’re obligated to give rather than buying something forgettable for yourself.

The key is to think of the rewards as a tool to improve your financial state. If you have a $30 Amazon gift card, how can you use it to make your household finances a little better?

If your card offers “cash back” rewards, use that money for a smart financial purpose.

Some cards offer true “cash back” in the form of an actual credit on your bill. If that’s the case, look at that savings as an opportunity to do something smart with your money.

Consider taking that reward in the form of a payment sent directly to you, then use that money for something smart, like contributing to a Roth IRA or making an extra payment on a student loan debt or contributing to an emergency fund. Those uses will have a real positive impact on your finances going forward, one that will reverberate and continue to grow over time. A $50 extra payment on your student loans, for example, can result in $100 less in principal and interest paid over the lifetime of that loan, which means a much smaller final student loan payment and a quicker route to freedom from that debt. That will have far more impact on your life than a forgettable treat.

If your card offers rewards points, find ways to integrate the use of those points into things you would already do.

Some credit cards offer rewards in the form of frequent flyer miles, hotel points, or other points that can be redeemed for different kinds of rewards. People often use these points to reduce the cost of travel, as a year’s worth of points accumulated on this kind of card can turn into a couple of free airline tickets or some nights at a hotel.

While those kinds of rewards can be really enjoyable, consider using them to reduce the cost of a trip you’d take anyway rather than using them to finance a trip that you couldn’t quite afford without them. If you’re using rewards points to help finance a more expensive trip than you otherwise would have taken, consider that your trip would be wonderful and memorable without the rewards, then use the rewards to reduce the financial strain of the more reasonable trip.

For example, my wife and I used travel points to help pay for a trip to Las Vegas when we were first married. We used the points to extend our vacation by a day, but that extra day didn’t add anything memorable to the trip; by the time you add a sixth day to a five-day trip, you’re adding truly second-tier activities. Our memories of that trip would have been just as wonderful with a five day-trip within our means, and then our overall hotel bill would have been substantially smaller.

Plan your travel and other activities as though your credit card rewards don’t exist, then when you look at those rewards and apply them to your trip, they become money in your pocket rather than a small, forgettable extension to your vacation. If you can afford five days, plan for five days, then let your card cut the cost rather than trying to extend it to six days and stretch your finances to the limit.

Choose a reward credit card that lines up well with how you already spend money, so that you’re not tempted to change spending habits to chase rewards.

Another real challenge of rewards credit cards is that they can tempt you into changing your spending in order to get more rewards. They can entice you to start shopping at different retailers or to spend more than you would have before getting the card, just to earn rewards.

That’s a big financial mistake. Instead, seek out a credit card that gives you nice rewards for how you already spend money, then don’t change a thing about your spending because of the new card.

For example, the Target Redcard offers a 5% discount when shopping at Target. That’s a nice reward, but it shouldn’t entice you to spend more at Target or to switch your shopping to Target. Rather, you should only get the card if you already shop frequently at Target (perhaps you live close to a Super Target and use it for grocery and household supplies) and then continue shopping as you always have. If you do that, then the card will save you money.

On the other hand, if you currently shop for groceries at a discount grocer near your house and you start buying more groceries instead at Target because you’re saving 5%, you need to make sure that you’re actually saving money because the normal prices at the discount grocer might still be cheaper.

Furthermore, if that 5% discount is convincing you to regularly toss items in your cart that you wouldn’t otherwise buy, that card is costing you money because you’re buying stuff you would otherwise not buy. If you’re buying stuff you wouldn’t buy anyway, this discount isn’t saving you money — it’s costing you money.

A good rewards card saves you money or gives you rewards without altering your normal spending habits.

A rewards credit card is like a knife — it’s a powerful tool, but it can end up hurting you if not used properly.

Effective use of a rewards credit card is actually pretty simple.

Don’t carry a balance on the card or you end up costing yourself more than you earn in rewards.

Use a rewards card that complements how you already shop and doesn’t encourage you to shop more.

Use the rewards in a way that saves you money on what you’re already buying so you can actually pocket the rewards and use them for something productive, rather than using rewards for extra unnecessary purchases.

If you follow those simple steps, you’ll find that a rewards credit card can be a powerful tool in your financial arsenal.

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Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.