Rewards cards are a great way to save money, just by paying with a credit card. If you use a cash back card, you'll earn a percentage back on every purchase. Or you can use a travel card and earn either points or miles redeemable for travel purchases.
It's a valuable benefit, which is why these cards are so popular. More than half (56%) of consumers have cash back cards, and 49% have a rewards card, according to credit card research by The Motley Fool Ascent.
But you only save money with rewards cards when you use them correctly, and many people don't. If you have any rewards cards, or you're planning to get one, there's one key rule you must follow.
The No. 1 rewards rule: Always pay your credit card in full
When you pay your credit card bill every month, you have options. There's a minimum amount, and you need to pay at least that much. There's also the statement balance, which is what you owe as of the close of the last billing cycle. And there's the current balance, up to date for the day you view it.
Always pay your credit card's full statement balance (or the current balance). If you don't pay the statement balance, then your card issuer can start charging you interest. But if you pay the statement balance every month, you can use your card and earn rewards interest-free.
That's important, because interest charges will likely cost you more than any rewards you earn. The average rate on interest-bearing credit cards is 22.77%, according to Federal Reserve data. On a $5,000 balance, that would cost $1,139 in yearly interest -- far more than most people earn in rewards.
How to ensure you can pay in full
Paying your credit card in full is common advice, but it's easier said than done. Credit cards make it convenient to borrow money. Rewards cards, in particular, can incentivize you to spend more. It's tempting to overspend when you know you'll be earning cash back or points in the process.
When people end up in credit card debt, it's normally for one of two reasons:
- They get into the habit of spending more than they can afford.
- They need to use their credit card to pay for an emergency.
Here's what you can do to solve each of these issues.
Overspending: Treat your credit card like a debit card
The danger with credit cards is that they allow you to spend money you don't have. To avoid overspending, don't make purchases on your credit card that you couldn't afford with the money in your bank account. If you follow this approach, you'll always be able to pay your credit card bill in full.
Emergency expenses: Build an emergency fund
Everyone has to deal with unexpected bills from time to time. If you haven't already, save money every month to build an emergency fund. The most common rule of thumb is to save enough for three to six months of living expenses.
Coming out ahead with rewards credit cards
It's possible to get lots of value from rewards credit cards. But that all depends on whether you pay your bill in full and stay out of credit card debt. If you can do that, you'll get the benefit of earning rewards without the cost of expensive interest charges.
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FAQs
The most important rule with rewards credit cards is to always pay the full statement balance on your card. If you don't, you can be charged interest, which will likely outweigh any rewards you earned.
What is the number 1 rule of using credit cards? ›
Always Make Payments on Time
One of the most essential rules to owning a credit card is paying bills on time. A single late payment within a year of on-time payments might not seem to be much, but it could be a slippery slope that leads to debt and low credit scores and it will impact your credit.
What is the 2 3 4 rule for credit cards? ›
According to cardholder reports, Bank of America uses a 2/3/4 rule: You can only be approved for two new cards within a 30-day period, three cards within a 12-month period and four cards within a 24-month period.
What is the golden rule when using a credit card? ›
Pay Off Your Balance
The golden rule of credit card usage is to do everything you can to pay off your entire balance each month.
What is the 2 90 rule for credit cards? ›
1-in-5 rule: This states that you can only apply for one American Express card every five days. 2-in-90 rule: You can only be approved for up to two American Express cards within a 90 day period.
What is the smartest way to use credit card points? ›
Credit card points (e.g., Chase Ultimate Rewards®, American Express Membership Rewards, etc.) are flexible because they can be used in many ways. The best ways to use these points is often to transfer them to airlines or hotels or use them in lieu of cash when booking travel directly from credit card's travel portal.
What is the biggest mistake you can make when using a credit card? ›
Not paying on time
Sometimes, schedules are busy and budgets are tight. But it's best to always pay at least part of your credit card bill on time. Missing or late credit card payments can have a big impact on your credit score and fees.
What is the 50 30 20 rule for credit card payments? ›
Budgeting with the 50-30-20 rule
All you need to do to make a monthly budget with the 50-30-20 rule is split your take-home pay (that is, after taxes and deductions) into three categories: 50% goes towards necessary expenses. 30% goes towards things you want. 20% goes towards savings or paying off debt.
What is the 15 3 payment trick? ›
By making a credit card payment 15 days before your payment due date—and again three days before—you're able to reduce your balances and show a lower credit utilization ratio before your billing cycle ends. That information is reported to the credit bureaus.
Is it better to pay a credit card twice a month? ›
As 30% or lower is the ideal credit utilization ratio, a single credit card payment is not your best option. Paying half your bill twice a month—such as with the 15/3 rule—would keep your credit utilization ratio at 22.5% or less throughout the month.
Pay your balance every month
Credit card balances should be paid on or before the due date. Paying the balance in full has great benefits. If you wait to pay the balance or only make the minimum payment it accrues interest. If you let this continue it can potentially get out of hand and lead to debt.
What are the new credit card laws for 2024? ›
Consumer Financial Protection Bureau Releases Final Rule on Credit Card Late Fees, with Overdraft Fees on Deck. On March 5, 2024, the Consumer Financial Protection Bureau (Bureau) announced the final rule governing late fees for consumer credit card payments, likely cutting the average fee from $32 to just $8.
What is the 10 rule for credit cards? ›
It says your total debt shouldn't equal more than 20% of your annual income, and that your monthly debt payments shouldn't be more than 10% of your monthly income. While the 20/10 rule can be a useful way to make conscious decisions about borrowing, it's not necessarily a useful approach to debt for everyone.
What is the new rule for credit card? ›
Among several changes, the new RBI rules stipulate that at least once, the cardholder will be provided option to choose any date as the starting or closing date of the billing cycle. Instructions relating to credit cards will apply to all credit card issuing banks and non-banking financial companies (NFBCs).
What is the golden rule of credit cards? ›
Pay on time, in full, every single month
Many people see “minimum payment” on their bill and think that's the only amount that needs to be paid in order to avoid penalties. But the reality is, interest kicks in immediately for any unpaid balance. If you're just paying the minimum, you're losing.
How to maximize credit card rewards? ›
Charge everything (and pay it back quickly)
You can maximize rewards by charging all your purchases to your credit card. Rewards cards offer either a set number of points/miles or a percentage of cash back on every dollar spent. So the more you charge, the greater your rewards.
Is it better to use points or get cash back? ›
Cash-back credit cards typically offer better value when the redemption options on a points card don't appeal to you. If a points card offers cash-back options at all, it may offer cash back at a lower value than other redemption options.
What is the best use of credit card reward points? ›
To get the most value from your points, redeem them for high-value options like travel or points transfers to airline and hotel partners.
What is the main rule for using credit cards? ›
Pay off your balance every month.
Avoid paying interest on your credit card purchases by paying the full balance each billing cycle. Resist the temptation to spend more than you can pay for any given month, and you'll enjoy the benefits of using a credit card without interest charges.
What is the 15 30 rule for credit cards? ›
When you have a credit card, most people usually make one payment each month, when their statement is due. With the 15/3 credit card rule, you instead make two payments. The first payment comes 15 days before the statement's due date, and you make the second payment three days before your credit card due date.
What is the 5/24 rule? Many card issuers have criteria for who can qualify for new accounts, but Chase is perhaps the most strict. Chase's 5/24 rule means that you can't be approved for most Chase cards if you've opened five or more personal credit cards (from any card issuer) within the past 24 months.
What's the first rule of using your credit card the right way? ›
1: Always pay your bill on time. Paying your bill on time and in full will help you avoid interest charges, late fees and poor credit scores. If you can't afford to pay your bill in full right away, make sure you at least make the minimum payment on time.
