If you use rewards to earn money back each month, you can increase how much you save each month. If you earn cash back, you can move those earnings into your savings directly.
If you combine investing your rewards with the power of trading fractional shares—which Betterment does on your behalf—then you can put more savings into investments each month.
When you’ve set clear financial goals and figured out how much you need to save to reach them, you may still find that your paycheck still can’t fully fund them all. Inevitably, you only make so much income in a given month, and so, the question naturally arises: “How can I save more?”
And while we have many answers to that, one way many Americans look to squeeze out more savings is by earning rewards on credit card purchases, while diligently paying them off in full every month. 1-6% back on purchases can quickly build up, and if your family’s monthly spending (on cards) is above $3,000, that savings could even amount to up to around $100 per month you may be able to invest for the long term.
While it’s important to understand the behavioral risks of credit cards and their high interest rates, if you’re a disciplined card holder that never carries a balance, then the credit card strategy we discuss in this article may be useful to you.
Let’s start by surveying the landscape of credit cards and which kinds of credit cards help you to invest.
What kinds of credit card rewards help you invest?
The important thing to remember about credit cards is that they are designed to entice you to spend more, especially when they reward you on certain categories of purchases. To use them effectively for saving more toward your investment goals, you should be confident in your self-discipline.
Not only should you avoid holding any balance month-to-month; you should never spend more than you would with plain cash. On a psychological level, understand that earning rewards can make spending more enticing, so the strategy we lay out here is for only the most disciplined optimizers. What does discipline look like? Here are two important elements:
- When you earn rewards, you’re faced with the option to save your rewards or buy things you wouldn’t normally buy. And card programs usually offer many ways to spend your rewards away. Good credit card discipline means only using rewards to save more of your overall income; not spending them on things you wouldn’t normally buy, like airline upgrades.
- Also, credit cards with rewards often have annual fees, often greater than $100. If you consider cards with fees (which we’ll mention a few below), you’ll need to do the math to make sure that your anticipated spending, the card’s rewards rate, any sign-up bonuses, and the upfront fee all work out to be in your favor. Don’t pay credit card fees if you won’t earn more in the long run.
Generally, credit cards reward you in either cash back or private currencies like points or miles. They each have their own advantages.
Advantages of cashback credit cards
Cashback credit cards can offer a convenient way of saving more for your goals, because the cash can be withdrawn and invested toward your goals. However, cashback programs sometimes have lower rewards rates than what you can get in points or miles programs. For instance, based on our own review of the credit card marketplace, top flat cashback rates are currently between 1.5% and 2%. Meanwhile, point programs may offer 3-6X per $0.01.
Although a cash back rate may be lower, the more cashback you rack up, the earlier you can invest into the market. Your card may have a minimum cashback amount, like $25.00.
Advantages of points and miles programs
Points and miles programs may reward more, but they lock your money into a private currency that can’t be saved or invested as easily; they usually encourage spending. Moreover, by spending points on certain purchases, you can often earn higher value than on other purchases. This can cause all-too-common “analysis paralysis,” which means that in trying to determine how to spend your points, you don’t, which means you lose out on the time value of that money.
Still, some point-based credit card rewards can be cashed out for investing, or they can be used on normal purchases, like travel, which can offset a month’s savings with a little bit of discipline. You should generally use the points in a way that gives you the most marginal utility per point. And then however much value you get there, you can turn around and save on the basis that you would have been spending the cash.
If you need an example of this, just think about the end of year. Many consumers face increased expenses, the desire to travel for the holidays, and the opportunity to make smart end-of-year investments. If using points or miles to help you save for those travel plans, it could help you afford to fund your investment goals in December.
Consider these 7 card types to optimize your earnings.
For saving and investing, we think the card types that are the easiest to use to invest are those that put cash right back in your pocket (or at least back with a store or travel vendor you use regularly), So for this article, we’ll stick with cards that have cash back opportunities instead of cards that exclusively earn points or miles.
Here, we’ll suggest you aim to optimize your wallet by earning more on normal, everyday purchases you’re already planning on making. For instance, most Americans buy groceries. Currently, there is one credit card that offers 6% back on groceries on up to $6,000 in total annual purchases. That’s a lot of grocery spending. If you’re making a trip to the store anyway, why not get 6% back? (Speaking of which, are you using coupons?)
The more areas of life you can find to optimize with credit card earnings, the more those savings can be turned around and put toward your investing goals. A quick note on the suggestions below: We have no incentive to recommend these cards; we don’t have relationships with any of the vendors.
1. Aim for the highest flat rate—2% back—on all purchases.
Many credit cards offer 1% cash back on every purchase, but only a few offer 2% back. If you’re getting 2% back on every credit card purchase you make, $2000 in monthly spending can easily become $480 per year in extra savings that can be invested. Fidelity’s rewards card offers 2% back on every purchase, while Citi offers the DoubleCash Card, which offers 1% back for the purchase and 1% back when you pay it off.
2. Aim for the highest rate on grocery rewards—currently ~6%.
Grocery shopping is a must-do for most Americans, so why not earn more? The credit card marketplace offers upward of 5%-6% on groceries if you look carefully. On up to $6,000 per year, the American Express Blue Cash Preferred Card offers 6% back on grocery spending. Meanwhile, if you’re a Whole Foods shopper, the Amazon Prime Rewards Visa Signature Card gives you 5% back. More on the Amazon Prime card later.
Of course, if you grocery shop at a store that doesn’t take credit card, we don’t suggest going out and getting a credit card to shop elsewhere. Merchants with credit cards can have higher prices, so it may be that your cardless grocery is already saving you month-to-month, compared to some shoppers.
3. Aim for the highest rate on gas rewards—currently ~4%.
Driving is a reality of life that comes with regular costs. To save more from every gas purchase, there are certain credit cards offering top notch cash back (or store credit) rewards at 4% back. For CostCo members, their Visa card offers 4%, and if not, you can also use the Blue Cash Preferred Card to get 4% back that counts toward the 6,000 annual reward spending total.
4. Aim for the highest travel rate if you travel a lot—currently ~3%.
If you’re a regular traveler for work or pleasure, then getting 3% back or more on travel can really help your savings rack up. Especially if you travel for work regularly, your rewards rate can be like a small supplemental form of savings. Currently, there are two cards offering 3% back without locking you into a currency for a specific airline or other travel vendor: Chase Sapphire Reserve and the Wells Fargo Propel American Express.
The difference between the cards is their annual fee. Chase Sapphire Reserve has a $450 annual fee, while the Propel has no fee. However, the Reserve also gives you an immediate $300 statement credit on any travel, plus reimburses the cost of TSA PreCheck or Global Entry, which is worth at least $95. So, the headline fee can quickly get eaten up by those benefits. (Again, if you weren’t going to buy those benefits on your own though, that fee is hefty.)
If you really want to look into the value of each card, you’ll likely find differences between the valuation of Chase’s Ultimate Reward points versus Wells Fargo’s Go Far rewards points for making travel purchases, but if you’re simply cashing them out, then each card offers the same 3% earning value.
5. Aim for the highest dinner rate—currently ~4%.
If you’re one of the millions of Americans who eat out regularly, then it’s well worth your while to earn at the highest rate for dinner. While the Chase Sapphire Reserve and Wells Fargo Propel both give you 3% back on eating out, two cards offer an even higher rewards rate: the Uber Visa card and Capital One’s Savor Rewards card, which earn 4% back.
The cards do have a few differences though. Uber has no fee, while the Capital One Savor has a $95 fee, and Uber offers 4% back only on dining, while the Savor offers 4% back on both dining and entertainment (and generally has a sign-up bonus). So, your choice should depend on your habits. If you’re already spending enough on entertainment for the fee to be worth your while, then it might be worth it to consider the Capital One Savor.
6. Aim for the highest clothing rate—currently ~5%.
Another regular purchase for any American is clothing. But this one is tough because people have many different preferences for where they shop regularly. You shouldn’t let any credit card sway you toward shopping somewhere that you wouldn’t normally spend money—especially if that somewhere is a more expensive store.
Generally speaking, in today’s market, however, many clothing stores offer 5% back in store credit or cash back, and if you’re a regular shopper there, that can be worth your while since the savings will just funnel into your normal annual clothing purchases. Of course, the stores are counting on you spending more, but if you’re measured about your likelihood to buy from the same place, a store card can be avery sensible choice.
A few examples of clothing stores with at least 5% store rewards are:
- The Gap Card, which works at The Gap, Banana Republic, Old Navy, and Athleta.
- The TJX Rewards Card, which works at TJMaxx, Marshall’s Homegoods, and Sierra Trading Post
- The Target REDCard, which only works at Target
- Amazon Prime Visa Signature card, which earns 5% on any purchase on Amazon.com
- AEO Connected card, which rewards 15 points for each $1 spent at American Eagle or Aerie. Then, you’re rewarded with $10 on every 2500 points earned, meaning you get ~6% back.
- J.Crew card, which rewards $5 for every $100 spent.
- Ann Taylor credit card, which rewards 5% on any purchase at Ann Taylor, LOFT, and Lou & Grey.
- Christopher & Banks card, which rewards 15 points for each $1 spent at Christopher & Banks or CJBanks. Then, you’re rewarded with $10 on every 2500 points earned, meaning you get ~6% back.
In addition to these store-specific cards, U.S. Bank’s card lets you choose two categories to earn 5% back on for the year, up to $2000 in purchases. Two categories you can choose are “Select clothing retailers” and “Department Stores.” The current list for clothing retailers is: Aeropostale, American Eagle Outfitters, Ann Taylor, Banana Republic, Eddie Bauer, Express, Forever 21, GAP, J.Crew, Jos A Bank, Old Navy, Talbots, The Limited. The department stores listed are: Bloomingdale’s, Bon-Ton, Boston Store, Dillard’s, JCPenney, Kohl’s, Loehmann’s, Macy’s, Nordstrom, Nordstrom Rack, Off 5th, Saks Fifth Avenue, Sears, Soma Intimates, and Von Maur.
7. Aim for highest in online purchases—currently ~5%.
If you’re an online shopper, then of course you’re likely familiar with Amazon. You might even be familiar with Amazon Prime, which offers a number of benefits, including two-day shipping for an annual fee. If you’re already using Amazon Prime, then it may make sense to use the Amazon Prime Visa Signature card, which has no additional fee on top your Prime membership, but lets you enjoy 5% back on most Amazon purchases. In addition, as we discussed above, Amazon Prime gives you benefits at Whole Foods purchases.
What other questions should you consider?
Once you start exploring credit card rewards, you can easily fall into a black hole of confusing offers and terms. You’ll be faced with numerous bonuses using a wide range of numbers. Then, over time, you’re bound to face questions about your changing situation. We’ve addressed some of the important considerations below.
Should you consider rotating categories?
Discover It and Chase Freedom are two popular cards that offer 5% back on a rotating set of purchase categories. While the high rewards rates may seem useful to you, we think there’s reason to be cautious when considering these cards. Rotating categories means that each time a new high rewards category appears, you’re likely to be more inclined to make purchases in that category.
Think back to the premise of this article. The goal with credit cards should not be to spend more; rather, you should aim to optimize spending that you already will be making. If you’re extremely disciplined, then perhaps the psychology of rotating categories won’t tip your hand, but think twice about the choice.
How should I think about credit cards with fees?
Some credit cards (even mentioned above) have fees. And not all cards with fees are worth it. However, there are some cards with initial fees that can be worth your while if you spend enough in a year.
Let’s consider the grocery spending example. The American Express BlueCash Preferred lets you earn 6% back on groceries up to $6,000 for a $95 fee, and it offers a $250 bonus if you spend $1000 in the first three months. If you spend a moderate $400 per month on groceries for a small family, then you’ll easily get the bonus $250 and make up the fee the first year. It even pays for a second year. However, even without the bonus, 6% back on 12 months worth of $400 grocery spending is $288. Compare that to a flat 2% cashback ($96), and the extra earnings is worth $192. Even without maxing out the limit on rewards, you can still earn more than the fee.
Not all cards with fees are as generous, however. Optimizing your credit cards to earn more reward cash takes a bit of work, and you should carefully consider whether fees are worth it. If you find a card where the possible rewards don’t meet the fee, you can often find a competitor that may work better for you.
What if I stop making purchases in a certain category?
Say your children grow up and you stop buying as many groceries, or you move to an area with public transit and find you no longer buy gas as much—what do you do with a credit card?
Your credit score is affected by your length of credit, so it’s somewhat to your advantage to maintain open, healthy lines of credit if you can. While it’s not a hugely negative move to close credit cards, you might consider keeping your account open if it has no fee, or if it does, you could consider changing it to a no-fee version in some cases.
Many financial institutions offer a no-fee version of some cards for users in this kind of situation. An example is the Capital One Savor mentioned above. If you get the Savor and you find that you’re no longer making as many dining and entertainment purchases, rendering the fee less than worth it, Capital One offers the SavorOne Rewards card, which offers a lower rewards rate for no annual fee.
Remember, discipline is key to using credit cards to save and invest more.
We can’t repeat it enough. Do not hold a balance on credit cards. Pay every card off every month.
If you can’t get these basics down, you should absolutely not pursue the rewards benefits above. If you can get those basics down, remember not to spend more than you normally would. Doing so wipes out the increased savings that are possible because of credit cards rewards.
What we’ve laid out here, remember, is not what credit card companies want to have happen. They make money from people spending more and failing to pay off their balance each month. To some extent, benefiting from credit cards means being contrarian. That takes discipline, strong, clear goals, and a healthy sense of your cash flow.
We have no incentive to recommend the credit cards above; they are based purely on our perspective. When you consider getting new credit cards, you should always read the terms and conditions and consider the fees and interest rates, and any other pertinent information.
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