Optimizing Credit Card Rewards

Hello, we have a special guest writer today. The author has been a good friend for over 20 years, and someone whose judgement I respect greatly, especially in financial matters that require precision, depth, and breadth.

The author is currently employed by a firm where they are not encouraged to publish online, so for the time being, we are publishing this note anonymously.

The opinions in this article are solely that of the author, but I also strongly agree with the general framework of trying to achieve a balance between the largest rewards for the least amount of hassle.

I follow the author’s advice myself, and employ a Fidelity 2% cash back + Amazon 5% back on Amazon/Whole Foods + Cost Co 3% back on Dining/Travel strategy.

Please enjoy!

Aseem V. Garg, Chief Investment Officer of Ahara Advisors

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For years credit card users, seeking “rewards” from their spending, piled up thousands of miles with their favorite airline.  Sadly, the devaluation of those miles and difficulty of mile redemption with the airlines has pushed savvy credit card users towards another alternative: Cash Back.  Based on the current lineup of attractive cash back credit card options available today, even the most loyal of frequent flyers would be challenged to choose an airline’s mileage program over hard currency, particularly considering the potential for further reduction in the value of such miles in the future.

While hundreds of similar products exist, when considering the credit card to choose, the following tenets should be front and center:

1.     Maximize Cash Back – not points, miles, store credit, etc. Cold hard cash – the more the merrier.

2.     No Annual Fee[1] – if seeking to maximize cash back, paying an annual fee runs negative to this goal

3.     Keep it Simple – develop a simple credit card usage strategy to maximize cash back without being overly complicated, because everyone is busy with life

4.     No Foreign Transaction Fees – this is key for those that travel internationally with any regularity as a 3% FX works against maximizing cash back

5.     Easy Earning/Redemption – receiving cash rewards should be earned and redeemed in the simplest form, not via a special travel / dining portal

6.     Visa / Mastercard only – While American Express continues to make improvements in availability in the US, it is way behind when traveling abroad versus Visa / Mastercard in terms of acceptability

7.     Ignore APRs – Users should be paying their bills in full every month

With these tenets in mind, the backbone of a cash rewards strategy should be centered around a 2% cash back credit card.  When considering just one credit card to do all your purchases, the floor for rewards should be 2% cash back.  There are so many credit cards available in the market today that offer a flat 2% cash back that if your card is providing you with less, it is time to change the card. Depending on the time investment you wish to make, a higher cash back rate (2%+) can be sought by mixing in additional credit cards that provide higher cash back rates in specific categories.

[1] Many have argued that credit card annual fees pay for themselves with credits and perks associated with the card.  It should be noted that in order for that to play out, one would need to ensure that they take advantage of all of those benefits, otherwise they are not maximizing their potential earnings.  For those frugal consumers interested in maximizing credit card rewards, even the high annual fee credit cards don’t provide for superior cash back earning rates versus the strategies suggested within

2% Cashback Cards (lots of choices):

Credit Card	Annual Fee	3% FX Fee	Notes
Fidelity Rewards	None	No	Need to have a Fidelity account
SoFi Credit Card	None	No	Need to have a SoFi account
Bread Cashback	None	No	AMEX card, not Visa/MC
PenFed Power Cash Rewards	None	No	Need to have a checking account
Citi Double Cashback	None	Yes
PayPal Cashback	None	Yes	Need to have a PayPal account
Wells Fargo Active Cash	None	Yes
TD Double Cash	None	Yes	Available in certain states
Synchrony Premier	None	Yes
Keybank Cashback	None	Yes	Need to have a Key account
Evergreen by FNBO	None	Yes
Capital One Venture	$95	No

Cashback Cards to “Mix-in”:

Credit Card	Annual Fee	3% FX Fee	Notes
Alliant Cashback	None	No	2.5% cashback for the first $10k per billing period, then 1.5%. Need to have an Alliant account + other hoops to jump through
Chase Amazon Prime	None	No	5% cashback at Amazon/Whole Foods if a Prime member, 2% gas/restaurants, 1% elsewhere
Wells Fargo Autograph	None	No	3% on travel/dining, 1% elsewhere
Costco Anywhere	None	No	Need Costco membership, 4% gas, 3% travel/dining, 2% Costco, 1% elsewhere
Capital One SavorOne	None	No	3% dining, entertainment, groceries, 1% elsewhere
Capital One Walmart	None	No	5% Walmart.com, 2% restaurants/travel, 1% elsewhere
Citi Custom Cash	None	Yes	5% cash back in one category up to $500 in rewards a month
American Express Blue Cash Everyday	None	Yes	3% on groceries, gas, online purchases. Is an Amex

[2] The 2.5% cash back is one of the highest rates as a flat earning rate regardless of spending categories. While this sounds attractive, to earn this rate it requires commitment / work which runs against some of the basic tenets. “Hoops” that need to be jumped through include: opening a checking account, opening a savings account, maintaining a minimum $1,000 balance, having an electronic transfer once per month, etc. The limitation of receiving 2.5% cash earning rate on only the first $10,000 of spending per billing period is also frustrating for high spenders.

Mixing and Matching

For a frequent Amazon shopper and/or heavy travel and dining spender, a combination of:

1. A 2% cash back card (backbone)

2. The Amazon Prime card (used exclusively at Amazon/Whole Foods to earn 5%)[3]

3. The Wells Fargo Autograph card (used exclusively for travel and dining to earn 3%)

yields cash back that would be well north of 2% without much effort. Ultimately the right combination depends on the stores/categories at which users conduct their spending patronize. One should also consider the time associated with mixing such cards together as a user could get carried away with too many cards such that it becomes difficult to manage. Further, having limitations on the amount that could be earned at a “high” rate in a particular category is frustrating to monitor.

Final Thoughts

With so many choices and different spending patterns, there is no single one-size-fits-all strategy. For the user who just wants a single card, a 2% cash back credit card is the simplest path. However, with a little effort, a cash back percentage north of that base is easily achievable. With the continued growth of tap- and-pay technology permitting the use of Apple Pay / Google Pay it makes it easier to rotate between cards without having to physically carry the plastic with you – so don’t let the concern of a “fat” wallet hold you back.

Good luck in forming your winning formula!

[3] The great part of owning this card is that you don’t ever have to carry it with you.  Just load it into your Amazon profile and put the card away.  Note, this card is only a good deal if one is a Prime member.