Optimizing Credit Card Benefits: A Crash Course Artwork

Invest in Knowledge

Invest in Knowledge is a monthly podcast about all things financial with CERTIFIED FINANCIAL PLANNER™ John Gigliello of the Albany Financial Group, based in Albany, NY. Through the course of his business, as well as this podcast, John takes an educational approach to financial planning, aiming to leave listeners with the insight they need to successfully shape their financial futures. After all, as Benjamin Franklin said, "An investment in knowledge always pays the best interest." Securities are offered through LPL Financial, member SIPC (www.SIPC.org). Investment advice is offered through Private Advisor Group, a registered investment advisor. Private Advisor Group ad Albany Financial Group are separate entities from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This is a hypothetical example and is not representative of any specific situation. Your results will vary.The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

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Optimizing Credit Card Benefits: A Crash Course

February 07, 2022 • John Gigliello, CFP® • Season 1 • Episode 5

Is there anyone you know that does NOT own a credit card? Think about that for a moment. Did you ever have a conversation with someone about general money matters and perhaps you were talking about a recent purchase of some interest? And maybe then they replied with a purchase experience of their own, but mentioned that they either paid for the product or service with cash, check or they just postponed the purchase? I’m guessing not very often….perhaps never. Now I don’t consider myself a well-connected person, but over my adult life I’ve met many, many people and have had many, many conversations about money. And in all of that time, I’ve only met one person who did not own a credit card…..my mother-in-law. Not that she couldn’t have qualified for one, but she was just “old-school” whereby she either paid for something by check, cash or she just didn’t buy it.

Now, I have a little different perspective on that. I certainly understand her mindset and completely agree with the “if I can’t afford it then I’m not going to buy it” way of thinking. But I view the subject of credit cards, or more specifically credit, in a different light. Just as a carpenter might use a hammer and plane or an artist a brush and acrylics, I view credit and the use of credit cards as a tool, to be used to one’s advantage. But just like a carpenter’s hammer, credit can only be viewed as a tool if it is used properly. More about that later in the show.

Hi, I’m John Gigliello, Certified Financial Planner with the Albany Financial Group and you’re listening to Invest in Knowledge, a podcast about all things financial. After a life-altering health issue at 39, my calling in life became clear: To share my knowledge of personal finance with PEOPLE who are looking to make smart and responsible choices with their money. Only through education, action and accountability can YOU build the confidence and security YOU need to live a SATISFYING life.

Our topic for this podcast will be on credit card rewards strategies and how to maximize benefits. By the end of our show, you will have a much better understanding of the types of credit card rewards and how they are generated, how rewards are earned through regular spending, the proper use of sign-up bonuses, implementing credit card strategies and how credit cards can generate thousands of dollars in cash and travel rewards annually.

The content for today’s podcast was taken from an article written by Adam Van Deusen. And I do want to mention right at the outset here, that the techniques that I am going to discuss during this podcast are really intended for the individuals that have experience managing credit and are comfortable handling multiple cards and lines of credit at once. If you’re a newbie to credit cards, you can still gain excellent knowledge here, but be careful and use today’s education carefully.

To say that credit cards are abundant in the United States would be a gross understatement, like when the Black Knight in the movie Monty Python and the Holy Grail has each of his limbs cut off but says, “It’s just a flesh wound.” In 2018, there were 1.1 billion credit cards issued just in the United States alone. So let me change abundant to ubiquitous. And at the end of 2020, the average person was carrying four credit cards, which is actually down from previous years.

In financial planning, cash flow analysis is a fundamental part of the planning process. And many times in that analysis, the focus is mostly on how much one is spending and what they are buying. Cash flow analysis rarely pays much attention to HOW they are making those purchases and whether spending habits can become more efficient. While some folks might use methods that offer little in terms of rewards for their spending, such as cash, a no-reward debit card or even paper checks (remember those?),… by maximizing the value of credit card rewards, they can actually earn thousands of dollars’ worth of cash or travel each year for their regular spending! While maximizing credit card rewards does require some effort to determine the best card for a given individual, the payoff can be huge, potentially earning thousands of dollars or perhaps a free trip to Europe or Hawaii!

The first step in optimizing credit card rewards is to understand the different types of rewards and how they can be generated. Credit card rewards can be categorized into three primary groups: 1) cash back; 2) dedicated travel points that can be used for airfare or hotel accommodations; and 3) transferrable points that can be converted into cash credits, airline miles, hotel points or used for other rewards. Each type has its advantages and disadvantages over the others, and the best kind of reward for a given individual will depend primarily on their preferences for either earning cash back or travel.

Cash Back Rewards – the simplest type of credit card reward is cash back for purchases made on the card. For example, a card might offer 2% cash back on purchases that can be redeemed as a credit on the user’s monthly statement or deposited into their bank account. The primary benefit of cash back rewards is their simplicity and interchangeability, as the user knows exactly how much the rewards will be worth and can be used for any spending needs. For people who want to keep things simple, earning cash back can be a good choice. On the other hand, the upside value of the reward is limited to the cash back received, where as other types of rewards can have significantly more value depending on how they are redeemed.

Travel Points / Miles – Another type of credit card reward is points and miles earned for a specific airline or hotel company’s loyalty program. Most travel providers offer loyalty programs, which reward users of the service with frequent-flyer miles or points that can be redeemed for travel as well as upgrades and other service perks when flying on the airline or staying in the hotel.

These loyalty programs are extremely lucrative for the travel providers, but also offer significant benefits to travelers as well. In addition to earning miles and points for travel, many airlines and hotels also offer co-branded credit cards that consumers can use to earn additional miles. For example, an airline credit card might offer one frequent-flyer mile for each dollar spent on the card. Earning frequent-flyer miles and hotel points through credit card spend can be a good way to augment the miles or points with an airline or hotel that the consumer already uses, and redemptions for flights or hotel stays can often be worth much more than the equivalent cash back that could be generated on a different card. On the downside, airlines and hotels sometimes increase the price in miles or points for a given flight or hotel, making the rewards less valuable.

Transferrable Points – The third type of credit card reward consists of points issued directly by a credit card company that can be redeemed for a variety of uses. For example, credit card users can earn Chase Ultimate Rewards, American Express Membership Rewards, or Citi Thank You Rewards by paying for expenses with credit cards issued by each of these companies.

What makes these points unique is that they can typically be redeemed for a variety of uses. For example, the credit card user can opt to receive cash back as a credit on their statement, book travel using the points (instead of paying with dollars) directly through the card provider, or can transfer points to be used as travel points/miles with a range of airline and hotel partners.

This flexibility and the range of partners make these points particularly valuable. For example, while miles earned on a United Airlines co-branded credit card can be used to book flights through United, Chase Ultimate Rewards points can not only be converted into United miles, but also into miles on Southwest, JetBlue, British Airways, and other airlines, as well as into hotel points with Hyatt, Marriott, and IHG. Also, because the points can be transferred in increments (typically 1,000 points at a time), they can be used to “top up” balances with the travel programs themselves.

While transferrable points can be very useful, they can only be earned on credit cards affiliated with the issuing company. Individuals must also make sure to use their points before canceling their card because, unlike airlines miles or hotel points earned through credit card spending, these points are typically forfeited when the card is closed (unless the individual has another card that earns these points.)

Just as there are many different types of credit card rewards that can be earned, there are also many ways to earn those rewards through regular credit card spending. The simplest reward-earning structure offers a fixed return for each dollar spent, no matter the spending category. For example, the Citi Double Cash card offers 2% cash back on all purchases. For a person who values simplicity, prioritizes cash back, and does not want to think about which card to use for a given transaction, this style can be attractive.

A more common structure offers a base number of rewards for each dollar spent, with extra points earned in certain categories that remain fixed throughout the year. For example, the Chase Sapphire Preferred card offers three Ultimate Rewards points per dollar spent at restaurants, two points for spending on travel, and one point for all other purchases. The categories vary across the different cards, but some of the more popular options include gas, groceries, travel, and restaurants. For a person who spends significant money in one or more of these categories, a card with this structure can be valuable.

A third earning structure offers a base amount of rewards for each dollar spent, with additional cash back or bonus points for purchases in certain categories that rotate throughout the year. For example, the Discover IT card offers 5% cash back on up to $1,500 in purchases in certain categories each quarter and 1% back on all other purchases. The category for one quarter might be grocery stores, while the next quarter might offer 5% back on purchases at gas stations. Taking advantage of these bonus categories in each quarter can lead to better rewards relative to spending on a fixed-return card, but it does require the user to remember which categories earn bonus rewards in a given quarter.

Bonuses – While consumers can earn significant rewards through ongoing spending on cards throughout the year, the fastest way to earn rewards is through bonuses from signing up for new cards. Some cards offer a bonus simply for signing up, while the best bonuses typically require a minimum amount of spending on the card in a certain period of time. For example, an airline co-branded credit card might offer 50,000 frequent-flyer miles for spending $3,000 on the card in the first three months after the account is opened, and one mile for all purchases made on the card. A person who successfully spends $3,000 using the card in three months would get 3,000 miles (earned for spending $3,000) + 50,000 miles (as an introductory bonus) = 53,000 miles in total. Without the bonus, a cardholder would have to spend $53,000 on the card to earn the same number of points!

Because of the lucrative nature of credit card sign-up bonuses, individuals might be tempted to sign up for many cards during the course of a year. While this is possible, credit card companies do impose restrictions on how many cards an individual can have with the company and how frequently they can receive sign-up bonuses. These restrictions vary across card issuers and change over time. For example, Chase typically does not approve applications for cards when applicants have opened five or more credit cards from any issuer during the previous 24 months (referred to as the 5/24 rule) while Citi restricts users from earning a sign-up bonus within 24 months of either opening or closing the same card.

Another consideration, especially pertinent for people preparing to apply for a major loan (such as a mortgage or auto loan) is the impact of opening new credit accounts on an individual’s credit score calculation. While opening a new credit card account can positively contribute to one’s credit score (by increasing the total credit available and reducing their credit utilization ratio) credit applications typically result in a hard inquiry on the individual’s credit report, which can negatively impact scores.

New accounts can also decrease the average age of a person’s credit accounts and the age of the most recently opened account, which are other factors impacting one’s credit score. Ultimately, the net impact of applying for a credit card is likely to vary by individual, which means it may be prudent for folks interested in sign-up bonuses to start by opening only one new account at a time to see how each account impacts their credit score before applying for additional cards. People who sign up for multiple cards should also be mindful of the various payment due dates, as late payments will not only incur interest charges and penalties but will also create a negative mark on the individual’s credit report.

While significant rewards can be earned simply through normal ongoing spending, one of the fastest ways to collect substantial benefits is through credit card sign-up bonuses, as a single credit card sign-up bonus can be worth thousands of dollars’ worth of travel. Credit card companies are often aggressive in marketing their cards. And while some of these offers come with attractive sign-up bonuses, the best are typically found online and are often only available for a limited time. The travel blog Frequent Miler keeps an updated list of the best currently available credit card sign-up offers across a wide range of credit card issuers that can be a useful resource for many looking for recommendations. And credit card sign-up bonuses are not only offered for personal cards available to the broad public, but also for business credit cards limited to business owners as well.

The size of credit card sign-up bonuses can vary greatly, so it is important to consider not only the size of the bonus, but also whether the reward is appropriate for the individual. For example, a bonus of 50,000 points that an individual can choose to transfer to a variety of travel loyalty programs or to use towards a cash back bonus could be more valuable than 60,000 frequent flyer miles if the individual does not plan on redeeming rewards for flights.

When comparing sign-up bonuses, it can be useful to use a “cents per mile” framework. This allows an individual to compare the value they should expect to receive from different types of points or miles. For example, if a person received a sign-up bonus of 50,000 hotel points and redeemed those points for a hotel stay that cost $750, they would have received $750 / 50,000 points or 1.5 cents of value per point redeemed. The cents per point an individual receives for a given airline or hotel loyalty program will vary based on the specific company and type of reward redeemed. While no two redemptions for a specific airline or hotel are exactly the same, the Frequent Miler blog has estimated cents per point values individuals can reasonably expect to receive from travel redemptions through these programs. Let’s look at an example:

Jeannie is deciding whether to apply for a United-affiliated credit card with a sign-up bonus of 50,000 miles, or a Hilton-affiliated cards with a sign-up bonus of 100,000 points. According to the Frequent Miler website, the United Airlines MileagePlus miles have an estimated cents per point value of 1.3, while Hilton Honors points have a cents per point value of approximately 0.4. Based on these values, Jeannie estimates the United bonus would be worth about 50,000 (sign-up bonus miles) x 0.013 (estimated cents per point value) or $650 worth of flights, and the Holton bonus would be worth approximately 100,000 (sign-up bonus miles) x 0.004 (estimated cents per point value) or $400 worth of hotel stays.

So, in this example, even though the Hilton bonus was worth more points, Jeannie is likely to get more value from the United miles. Often, the best cents-per-point value comes from redemptions for premium-class travel, which can have a very high cash cost and cents-per -point value.

Assessing the relative value of reward points can also depend on how points will be redeemed. In the following example, business-class travel offers twice the cents per point value than economy-class travel:

Anthony is planning a trip from Coco Beach, FL to Paris. He recently earned 100,000 American Express Membership Rewards points after signing up for the American Express Platinum Card.

A round-trip economy-class airplane ticket costs $900 in cash and would require 60,000 points if he were to transfer them to one of American Express’ partner airlines. Therefore, the purchase of an economy-class ticket would be equivalent to $900 (ticket price) / 60,000 points or 1.5 cents per point. However, a business-class ticket costs $3,000 in cash or 100,000 points, for a value of $3,000 / 100,000 points or 3 cents per point.

Even though Anthony could fly economy and save the remaining miles for another trip, he chooses to take advantage of the higher-value option and uses his points to purchase a business-class ticket, especially because he enjoys traveling business-class but is not willing to pay for the expense in cash.

Ultimately, the best redemption offers for a person can come down to their unique preferences. Just as there is no single “right” choice for all those seeking financial planning services, there is no “right” miles or points redemption choice for everyone.

Converting Rewards into Travel – Folks who amass credit card rewards for travel have several ways to redeem them. Transferrable points (i.e., Chase Ultimate Rewards and American Express Membership Rewards) typically offer the most value because of their flexibility. They can be used to book travel directly through the credit card company’s travel portal, and can also be extremely useful for transferring to other airline and hotel reward programs, particularly when the individual has already earned miles or points (for example from business travel) but needs more for a given flight or hotel stay.

For example, Roger currently has 60,000 Ultimate Rewards points through his Chase credit card, and 35,000 United miles earned from flying for his job. He wants to book a United flight that costs 40,000 miles, but instead of earning the additional miles through airline travel, he simply transfers 5,000 Ultimate Rewards points from his Chase card to his United reward account and is able to book his flight with reward points.

Frequent flyer miles and hotel points are affiliated with loyalty programs belonging to a specific airline or hotel (i.e., American AAdvantage miles or IHG Rewards Club points.) And while airline miles and hotel points are less flexible than transferrable points, they do provide some flexibility for redemptions. Most major airlines are part of alliances (e.g., Star Alliance and one world Alliance) that allow individuals to earn and redeem miles with airlines across participating companies in the alliance. For example, Delta SkyMiles can be redeemed not only for flights on Delta, but also on other SkyTeam alliance partners, such as Air France and Korean Air. The ability to use miles for flights on other airlines provides more options when booking flights using awards points, particularly for international flights.

While there are no similar alliances for using hotel points, these points still offer flexibility in redemptions across a hotel chain’s portfolio of brands. For example, Marriott Bonvoy points can be earned and used at Marriott hotels, but also Ritz-Carlton, W Hotels, Westin and Courtyard hotels, among others.

While the most valuable component of credit card offers is typically the sign-up bonus, many cards also come with additional perks (and expenses) that can also be evaluated when making comparisons. Some cards affiliated with airlines or hotels offer perks related to that company. For instance, airline-affiliated credit cards often offer a free checked bag or priority boarding benefits to their credit cardholders, while hotels might off access to room upgrades. These perks can vary widely, but they still can be valuable for those who are able to take advantage of them.

Another consideration when evaluating a credit card offer is the annual fee that is associated with the card. Some cards with large bonuses and travel-related perks have large annual fees, so it is important to consider these in the calculation as well. Such as a card with a $95 annual fee offering a 50,000-point bonus is likely to be more valuable than a card with a $495 fee and a 60,000-point bonus for the same airline or hotel. At the same time, cards with higher annual fees often come with credits that can defray the cost of the annual fee. For instance, while the American Express Platinum card has a $695 annual fee, it comes with a $200 airline fee credit, $200 in Uber cash, a $200 credit for certain hotels and a $240 credit for specified digital entertainment providers, among other credits and rebates. For cardholders who are frequent travelers, these perks can MORE than make up for the annual credit card fee!

Cards with annual fees may not be worth keeping after the first year, but some credit card companies may offer retention bonuses for those who ask to close their account, so it can be worthwhile to call the card company each year to see what might be available. But keep in mind however, that closing a credit card can potentially impact an individual’s credit score by reducing their total amount of credit available or the average age of credit accounts (depending on how old the account is.) Therefore, it might not be prudent to close credit cards immediately before applying for a loan.

Lastly, those applying for cards should also consider whether a sign-up bonus will be subject to income taxation. While the IRS has not provided definitive guidance on the matter, points received for spending money on a credit card (including those received through sign-up bonuses and as rewards for regular spending) are typically treated as a non-taxable “rebate” for purchases made, while sign-up bonuses that DO NOT require spending on the card can be treated as taxable income. Credit card companies will typically issue the cardholder a Form 1099-MISC for any taxable bonuses.

And there you have it ladies and gentlemen, a crash-course on credit card rewards and how to maximize the benefits. Those folks who don’t travel much and who don’t want to manage multiple credit cards should benefit more from the flexibility and convenience of cash back rewards as opposed to point-based reward programs.

Those people who travel and who are willing to sign up for multiple credit cards in a given year can earn significant value from credit cards that offer transferrable points as well as those affiliated with the airlines and hotels they regularly use for travel.

I hope you have enjoyed today’s podcast, even if you are new to the world of consumer credit and managing credit cards. If you know of anyone who is a bit more “advanced” in the area of managing credit, please feel free to tell them about this podcast episode. We encourage you to take part in the planning process to help secure your financial future and in turn, feel optimistic and proud about your accomplishments. Knowing that I’ve provided education and a plan for my clients has allowed me to turn a PERSONAL CHALLENGE into a GRATIFYING JOURNEY.

If you’re looking to make smart and responsible choices with your money, then stay tuned for our next episode of Invest in Knowledge coming in early March. Have a wonderful day!

I am a registered representative with and securities are offered through LPL Financial, Member FINRA/SIPC. Investment advice is offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and Albany Financial Group are separate entities from LPL Financial.

The opinions voiced in this Podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.