As I noted in Earn Overview: How to Grow Your Income one way to pick up some extra funds is to look for small opportunities to make money here and there. Today we are going to talk about one of those opportunities: making money with cash back credit cards.
The idea is as simple as using a credit card to make your purchases and earning rewards and signup bonuses for doing so.
I have been using credit cards that give cash back for years now, netting several hundred dollars in extra money annually for doing nothing other than changing my form of payment.
It all seems pretty basic and easy, but it gets a bit more complicated when you get into all the decisions using credit cards. That’s what we’ll talk about in this post.
My Results
Before we get into the details and decisions, I thought you’d like to review how much I have earned with cash back credit cards so you can see the opportunity.
Here are my historical earnings for the past ten years:
- 2006 – $330
- 2007 – $500
- 2008 – $412
- 2009 – $845
- 2010 – $833
- 2011 – $2,289
- 2012 – $1,118
- 2013 – $1,819
- 2014 – $2,009
- 2015 – $1,869
Add those up and you’ll find that I’ve made over $12,000 in the past decade simply by paying with credit cards versus cash or check. Not bad, right?
Ways and What to Earn
As you will see above, my earnings varied widely from one year to another. I’ll tell you why throughout this post, but for now let’s focus on the two main ways to earn money with cash back credit cards:
- Rewards – These are payments based on a percent of your spending. Earning 1% cash back is standard these days for many cards but you can do much better than that.
- Signup bonuses – These used to be a gigantic revenue source for me (like in 2011) but I don’t see as many high dollar offers as past years. It could be that they don’t exist or that I’m just not in the market for them. But back in the day there were several cards offering $500 or more in bonuses!
One other way that credit cards can benefit you is by saving money. For instance, you can get an airline card (which usually charges an annual fee) and save a ton of money on baggage fees if you travel often. I’ve done this in the past, but since that’s more “saving” than “earning”, I’m not including those cards in this piece.
Before we go further we should also discuss what you earn. The two main options are 1) cash and 2) points. The lines blur a bit as some cards offer points that can be converted to cash, but those are the two primary distinctions available today.
Strategy Decisions
From the information above and from the cards available, you need to determine a credit card strategy that works for you. I’ll tell you what I do and why and from that you can decide if you’d like to follow suit or do something else.
Here’s my current credit card strategy:
- Rewards over signup bonuses. I’ve made big money in the past on the latter, but to be honest it’s just too much hassle and too time-consuming for me at this point (managing multiple cards is a nightmare). So I look at where I spend money and select cards that maximize rewards for that spending.
- Cash over points. I go for cash back, not points. There are a couple main reasons for this: 1) cash can be spent in any way, not just limited to the options the card offers 2) points programs are often complicated, seem expensive for what you get, and are hard to understand. It feels like the companies are trying to pull a fast one in allowing you to redeem, and I don’t want to have to learn the system to game it.
- Few cards over many. You can certainly maximize rewards percentages by having a ton of cards, but again this is a management issue (and believe me, I’ve had up to 10 cards at once in the past). It becomes especially difficult if there is more than one person using the cards in your family (I used to have to list out which cards my wife should use for specific purchases each month.) I now prefer to focus on a few cards that give me the most cash back with the least amount of time and hassle.
Your preferences might be different. For you the time investment may be worth it and you might decide to manage several cards. Or you might prefer points as you are already part of a program where they can be used. Or you might want to work the system to focus on signup bonuses. All of these are fine. I’m just telling you what I do and why. You decide what works best for you.
Personally I’ve been back and forth over the years. I had few cards, then many, now few again. I’ve also moved from a rewards focus to signup bonuses back to rewards. I’ve even dabbled a bit in points programs. But for me at this stage in life, the strategy above works best for me.
My Current Cards
To get a bit more specific, here are the cards I am currently using and why:
- Fidelity American Express — Pays 2% cash back on every charge made. The rewards are deposited automatically in my Fidelity account. This is my most used card and basically guarantees me a minimum return on purchases of 2% (there are places that don’t accept American Express so sometimes I do need to take a lower percentage). It was recently announced that this card is switching to a Visa card which will make it even more valuable.
- Chase Freedom — Pays 5% in rotating categories which change quarterly. I use it mostly when either groceries or gas are offering 5% cash back since those are two big categories for us. It was also very handy the last quarter of 2015 when they paid 5% back (plus a 5% extra bonus) on purchases made at Amazon.
- Chase Ink — Gives us 5% cash back on cable and cell phone charges. Given we spend $300 on these each month, it’s an easy $180 a year.
Ways to Maximize Results
The best way to maximize the rewards you receive is to put EVERY PURCHASE POSSIBLE on a card. If you have a choice to pay with cash, check, or card, pay with a card (assuming there are no extra fees). Here are places I’ve charged that have helped drive up my returns:
- Some purchases for our rental properties (especially the new appliances, which we have in every unit)
- Work travel costs (which can be significant and for which I am reimbursed)
- We have been on a few cruises and all costs have been charged
- Charitable contributions
- Gift cards. In some cases, you can buy gift cards at a grocery store and because a card offers 5% cash back at grocery stores, you get 5% on gift cards purchased there. This has the potential of turning any purchase — restaurant, home improvement store, department store, and on and on — into a 5% cash back opportunity. Note: One vital part of using the gift card strategy is to make a test charge on the card at the location where you get the gift cards to see how the card company processes it. Do this with a small amount, like a $25 gift card, before you make any big gift card buys to ensure you’ll get the bonus you expect.
- Extra bonuses. Some grocers give you bonus rewards based on your purchases at their stores — the more you buy, the more you earn. Obviously buying gift cards will concentrate purchases at a store and thus drive your rewards to new levels. And some stores even give extra bonus credit for gift card purchases. I’ve noted in the past that Kroger sometimes gives double fuel points for gift cards, so $100 in gift cards nets 20 cents off per gallon instead of the usual 10 cents off per gallon.
- Tack onto promotions. In addition, many stores run regular promotions with gift cards. Our grocer just had an offer where you got $5 off the purchase of jeans with a $25 gift card purchase. It was back-to-school time, so I’m assuming many people needed jeans for their kids. We didn’t, but if we had this promotion would have made my plan even more lucrative.
One time I even paid for part of a new car with a credit card. I negotiated the best price I could (I was paying without financing) and then asked if I could pay with a credit card. The salesman about died, but asked his supervisor and they allowed me to put $2,000 of the total on my card.
Caveats
The rosy picture painted above isn’t to say this strategy is perfect or isn’t without its detractors. For instance, using credit cards to make money only works if you follow strict guidelines including:
- You can’t spend more than you normally would because you have a credit card. There is research showing that people spend more when they use a credit card. This doesn’t mean ALL people spend more when using a credit card and you need to guard against it. All you want to charge is what you were already going to buy anyway. You’re just changing payment methods.
- You can’t keep a balance on your credit card. You MUST pay it off every month.
- You can’t have any fees associated with the card (like late fees). An annual fee may be worth the cost as long as what you get out of the card is much more than the annual fee (like the airline cards mentioned above) but generally fees of any sort are a no-no.
Some people fear that opening new credit card accounts will lower their credit scores and ultimately cost them more than they earn in rewards. If done correctly, specifically opening new cards without closing older ones, it appears form my experience that adding a new card now and then has minimal if any impact on your credit score — and could actually increase it. And even closing a card has minimal impact. My personal credit score was very high (790 to 805) the entire time I was adding and changing cards around.
In addition, some people don’t like cards at all (like the Dave Ramsey crowd). They view cards like alcoholics view alcohol — they’re bad and never to be touched. I don’t go quite that far. If you can’t control yourself then of course you shouldn’t be using credit of any kind. But if you can, using credit cards to earn cash back can give you several hundred dollars a year and several thousands over the years.
How about you? Do you use any credit cards with reward programs?
Bill H says
I too have the Fidelity American Express and Chase Freedom.
I also have the AARP Credit Card from Chase. It offers 3% cash back on restaurant and gas station purchase and 1% on everything else. Sometimes they offer a $100 sign up bonus too. It is a great deal if you are an AARP member.
ESI says
I just became one! I’ll check into it. Thanks!
Mark says
I use the Citi Double Cash card for the standard 2%, Chase Freedom for the rotating categories, but then my third card is the Amex Blue Preferred. Even with an annual fee it more than pays for itself with 6% cash back at grocery stores.
Joe says
I agree with Mark. I use the Citi Double Cash card for the 2% cash back. It is like buying everything in the USA 2% off. It is also great because domestic airline tickets usually only return about 1 cent per mile when redeemed. The domestic airline tickets that are more expensive and might return closer to 2 cents per mile are usually on Thurs, Fri, & Sun and rarely have useful award availability. So I prefer to earn cash back and buy the plane ticket I need at the best price Google flights can find.
For international trips, as ESI Money points out, sign up bonuses for points (especially that can be converted to airline miles) are a great option. They take a bit of foresight and advanced planning.
K D says
We too have earned a lot using credit cards over the years. The great offers sign-up offers seem to be fewer these days but we did just sign up for an AMEX Blue card, we’ll receive $250 credit for charging $1000 in the first three months plus 3% back on groceries going forward (and there’s no annual fee).
Our most used card is a Southwest Airlines affiliated card but I use Discover for the 5% cash back rewards (when it’s home improvement stores I just buy gift cards). I also use a BOA Visa for 3% cashback on gas and an Amazon Visa for 3% back on Amazon purchases. Sometimes it is confusing. We do not charge everything because we like the feeling of a bit of anonymity that we get when using cash.
Mike H says
I certainly use these type of card whenever I can. Normally I get points but at times I’ll be getting cash back.
Since these sums add up so high (over $600) do you ever have to report these as income to the IRS?
Thanks,
Mike
ESI says
“In general, credit card rewards are viewed by the IRS as a discount, not income. So if you’re getting 2% cash back, that would be considered a 2% discount on your purchases. Discounts aren’t taxable, so you don’t need to keep track of your credit card rewards for tax time.”
Source: http://www.nerdwallet.com/blog/credit-cards/credit-card-rewards-taxable/
Mike H says
Thanks for explaining that ESI!
ThomasC says
Over the last 7 years we’ve earned about $2700 in rewards, topping out last year at $510. I’ve done a bit of optimization in the last year, but could probably benefit from some more changes.
We have three cards currently.
1) We use Chase Freedom for the rotating categories, primarily groceries, gas, and restaurants. Groceries make up the bulk of our spending on this card. This used to be our primary rewards card. Once Costco switches over to Visa, I’ll use this card instead of my debit there.
2) I applied for a CapitalOne 1% Cash Back card several years ago before a trip to visit family in Europe because it has no foreign transaction fees. At the time it was 1% cash back. Then they upgraded it to QuickSilver (1.5% cash back), at which point it became our primary card. Currently, I have one bill a month automatically charged to the card to keep it active.
3) I converted a Citi airline rewards card to the Citi Double Cash at the beginning of 2015, and this has been our primary since. I’m pretty happy with the 2% back, and have tried to put as much of our monthly spending on this card as possible.
I’m considering the Amex Blue Cash Preferred card for 6% on groceries (projected ~4% after taking into account the fee) . If we only used it for groceries, we’d be at ~4% cash back after taking into account the yearly fee. I’d also like to find a Visa card with a higher base rewards rate than 1%, this would primarily be for Costco purchases.
DC says
I started with a Chase Freedom card as my first credit card for the cash back and rotating quarterly rewards. I later applied for an overseas job which required me to get a 0% foreign transaction fee card.
The two rewards leaders that I found for that were the Chase Sapphire Preferred and Barclaycard Arrival+ World Mastercard (I think they’ve renamed this mouthful into something more palatable). I get 2 pts per $ spent plus 10% of my points back when I redeem them on travel. Their definition for travel seems loosely defined as I can redeem for local travel like cabs and ubers. Even if I wasn’t working abroad or traveling in the US for work, I’m bound to take a trip or two at some point which gives me an opportunity redeem the points.
I put absolutely everything I can on my card because, even though the rewards aren’t significantly high, paying with cash feels like leaving money on the table. And I hate change. As in the currency.
Ben E says
Great post. Even better, you can leverage those point rewards for even better travel benefits. 2% cash back is great. However, if you do significant travel (particularly overseas), you can use those points even more.
Example: 120k Chase Freedom points = $2,400 (at 2%). Two economy round trip tickets to France = $2,800. It’s a $400 advantage to book using points rather than cash. (For the savvy, yes, I am simplifying it, but the principle remains the same). These points can be leveraged to fly business class for potentially much more than a 2% cash back value.
In general, 2% cash back is the way to go for most people. For travelers, the benefits can be even better.
K D says
Not exactly a reward, but a credit card perk. Last summer my husband bought a new Mazda. We planned to pay cash but discovered that there was a $500 off offer for financing and an additional $500 off financing if you had a Chase account (we have a Chase Visa). I had done my homework so we financed the minimum ($4,000) and paid it off but saved almost $1000 by doing so.
Xyz says
Nicely explained, I got $1000 last year and plan to double that amount this year.
Jef says
Hey ESI,
Nice little post here and looks like a decent little earner for you 馃槈
I’m interested to know if there were any sites out there that covered credit card rewards programs for Australia?
Possibly a long shot although thought I’d ask
ESI says
Not sure, but I’ve never looked to be honest.
You can Google around a bit to see what you find…
Douglas Antrim says
This really is an easy way to pick up a little more cash. I use the Capital One which pays 1.5 percent of every thing you buy. (cash advances not included). When I make a purchase I know I have to pay this off in the next 28 days or I will start to pay interest. I make it a point to pay the new charge off the next day. Also if you decide to do this it’s important to use a credit card that does not have a balance,
J says
Between new cards and a new bank account, just earned ~$1K in 2 months. And love the fact that it’s tax free.
But I noticed a discrepancy with one bank’s reward card upgrade options: a points card offered 3% back on groceries while the cash back card only offered 2%. The threshold for the same signup bonus was half for the cash back card–$500 as opposed to $1000.
I always opt for statement credits with my points anyway, as they’re usually a 1% redemption in contrast to giftcards or other merchandise, which at last check several years ago could run less than 1%. (ie 5000 pts for a $35 giftcard) I also figure the cash is more versatile, not locking me into a specific store.
And since the higher threshold was no problem, I went for the points card to earn more on groceries.
But yes, managing the extra cards is a bit challenging. Especially since a couple of them came with 0% rates. These I take advantage of by investing the money set aside to cover charges in CDs that will mature just before the teaser ends, and that come with higher rates than the “high yield” savings.
Adrian says
I missed the point I really wanted to learn. How can I automatically pay my household bills with my credit card? Groceries and gas are easy enough, but I鈥檇 like to pay all my utility and insurance bills and even my house payment this way, but I鈥檝e never been able to figure out how to set it up. Do you know how to do this?
ESI says
Some places have auto pay options (our utilities in Michigan did), so check that out. Just be sure they don’t charge extra fees for paying that way.