How to Earn 3% Cash Back on Your Credit Cards

On my post titled Over $700: I'm Going to Earn More Credit Card Rewards This Year, I had one reader state the following:

In 2007, we spent a little over $40K total with cards and earned $1,233 for an average of about 3%.

I asked him about how he did this as 3% is a pretty good return. He responded:

It's a hybrid approach and yes, there is a grandfathered 5% g/g/d Chase card involved that's no longer available--and I'm sure it's only a matter of time before Chase converts this to a 3% (3.75% if you wait to redeem) card. But even when that happens, I don't think it won't affect my % all that much.

So, here's the entire run-down:

• Chase Visa Rewards: 5% on g/g/d

• Discover: 5% on changing categories (currently airlines, hotels, car rentals this quarter)

• Costco Amex: 3% on dining out (all types of restaurants)/2% travel. We also did all our online holiday shopping with this card, as they had a special offer in December giving back 3% on all online purchases. (Watch your junk mail carefully, I almost threw this offer out.)

• Costco Business Amex: Don't have this one yet, but I'll be replacing the above Costco card with this when Chase kills my 5% card, as this will add 5% gas to above Amex categories.

• Chase Professional MasterCard: 3% on dining out (all types of restaurants), gas, office supplies, hardware/home improvement.

• Orchard Bank/HSBC MasterCard: This is the card of last resort since it offers 2% on EVERYTHING ELSE, but limits the rebate to $400/year ($20K in charges). So we're careful about using up our rebate on this one when we can get 2% (or more) on another card.

• We also have a few store-specific cards with rewards programs that offer 5% back in store gift cards/certificates that are essentially same as cash, since we'd be shopping at those stores anyway.

Most of the cards I've listed give back 1% for categories not listed, but I only charge appropriately with each card to earn the maximum available. Since I got the Orchard/HSBC card, NOTHING earns less than a 2% rebate.

I could do a little better by adding a 3(.75)% Chase card to cover a few more categories like cell-phone bills, but at this point that's probably overkill. When Chase forces me into that card, I'll make that work.

Anybody who's not averaging 2% on up to $20K of charges ought to seriously re-examine their "strategy" since that can be easily attained using just one card.

A few thoughts from me on this:

1. Yes, you can certainly earn a good return if you have a high-rate, grandfathered card that's no longer available to new users. Unfortunately, the rest of us can't get in on this action.

2. Personally, there's a "hassle factor" that I don't want to deal with. Two cards is the maximum I'm willing to deal with. Having, managing, and using an extra 5-10 cards to get a bit more back, simply isn't worth the effort.

3. He's right on the 2% issue. Personally, I think I can get to 2.6% with two cards. I'd probably be higher if I had $40k in charges like he has.

4. I wonder what his return would be without the grandfathered cards. I'm guessing it's probably somewhere near the 2.6% I'm shooting for with two cards.

Comments

[Travis Williams]

Seems like a lot of hassle with all of those cards.

[Keya]

How come you guys can racks up 40K in credit card bills year in and year out. I can hardly charge 12K. Is there something i am missing other than Gas/Groceries/Deaprtments/Restaurants/Travel/Wireless bills

[FMF]

Keya --

My big ones this year were:

1. I bought a new road bicycle.
2. My family went to Disney.
3. I put all company travel on my card (and get reimbursed.)
4. Presents -- Christmas, birthdays, etc.
5. We bought a new computer.

[MelMoitzen]

Keya--For a start, daycare & summer camps for my kids=about $22K/year.

Some of what I spend is reimbursed through work (and I do a lot of shopping for my elderly parents). So there is some arbitrage, not personal expense--reaping the benefits spending OPM.

So much of this depends on your own individual spending pattern. If, for example, I were a road warrior business traveler or heavy vacationer, I'd probably do just fine carrying only one card (and average 3% with it)--the Costco Business Amex. 5% on gas, 3% on restaurants, 2% on every other travel component (air, rail, hotel, car rental).

The effect of my grandfathered 5% card is really pretty negligible when you look at the big picture. I'll still get 5% back on my gas after the Chase card is discontinued using another card that pretty much anyone can get today. Discover has occasional 5% grocery bonuses I take advantage of, and you can, too. We spent $3K in grocery & drugstores in 2007, so the difference in rebate (from 5% to 3.75%) on this amount in 2007 would have been $37 less than what I got this year--which would have gotten me an adjusted total rebate of $1,196 on $40K, or 2.99%.

I don't mind the "hassle factor" because frankly, I don't find it to be any more of a hassle to manage a half-dozen card accounts than I do one or two. Maybe it's just the way I'm wired--those shaking their heads at this approach are probably those who "shouldn't try this at home" or they'll wind up with late fees negating all the benefits. Quicken (and a calendar ensuring that you're getting and processing all the relevent bills on time) can be your best friend here.

In the end, it *IS* the resulting "hassle factor" from multiple accounts that will up your percentage, drawing the correct card out of a pool of a half-dozen each and every time you make a transaction to ensure you're getting the maximum benefit available on that transaction in more categories than the next guy. It's all second nature to me and managing six accounts costs me at most ten minutes more per month than it does to manage one or two accounts.

To me, the hundreds of extra dollars coming my way as a result of that trivial effort are well worth it. YMMV.

[Ryan]

I also have no problem using multiple accounts. It actually helps for budgeting purposes since my gas, grocery, and drug store purchases are on one card and my restaurant puchases on another, travel on another, etc.

[FMF]

Mel --

If I can get 2.6% carrying two cards, is an extra 0.4% worth carrying several more? Also, 0.4% certainly isn't "hundreds of extra dollars." On $40k in charges, 0.4% is $160, so for me it may be an extra $100 (I don't have $40k in charges.) Still the extra cards and hassle aren't worth it.

Now if it was $500 more or so...then it might be worth it.

[MelMoitzen]

"Still the extra cards and hassle aren't worth it."

Did you forget to add "...to me"? Let's not forget the "personal" in "personal finance," in that everyone's situation is different.

I suspect most of the readers of this blog are closer to averaging 1% than they are to 2.6%. A bump to 3% may not be worth it to you--and frankly, if I were averaging 2.6%, I can't say I'd bust my butt to get another 0.4%--but it may very likely be worth it for those who are earning 1%.

[Josh]

My wife and I are trying this with two cards currently. Amex costco for dining out (3%) then chase freedom gives 3% on top 3 categories (ours will probably be groceries, gas, and whatever else).
-Josh

[FMF]

Mel --

Of course, everyone needs to make their own choices. Carrying several cards to make a bit extra isn't worth it "for" or "to" me. If someone else wants to do it, that's their choice.

BTW, the comparison isn't really 1% to 3% because we know those who currently make 1% could make 2.6% with two cards. The "hassle factor" comparison is 2.6% to 3% for a two-card strategy to a multi-card strategy.

Then again, I'm yet to prove my strategy as I'm just starting it this year. So we'll see if it works.

Overall, I think your suggestion is a good one for someone who wants to maximize their credit card rewards and can deal with handling multiple cards. That's just not me.