I won’t dare to say that this will be a comprehensive post on credit cards or credit card points. Believe me that there are plenty of blogs out there fully dedicated to this topic, and if you’re looking for the best ways to make use of credit card perks, there’s no shortage of material. This comparatively short post will do nothing more than offer an extremely high-level overview of how a FIRE saver can use credit card points to their advantage both while saving for early retirement and while in retirement.
Needless to say there are quite a few options out there for credit cards, many of which offer a variety of different perks to entice customers. Some of the more common perks you’ll come across include “cash-back” options, hotel points, airline miles/points, and points that are transferable or exchangeable for products and/or for travel rewards. Travel-related rewards have become the bread and butter of the credit card perk industry, so if that sounds interesting to you, then read on.
Before going through each of these, we need to stipulate an important point for the record, and it’s this: these credit card rewards have their highest value if you pay off your balance in full each month. If you carry a balance on a credit card, you’ll pay handsomely for the privilege, as credit card interest is some of the highest out there and can definitely spiral out of control. So before you hop into the credit card arena, make sure that you’re sufficiently responsible to pay the balance off each month. If you do, then the rewards that cards offer become a perk for routine spending.
Cash Back/Co-Branded Rewards
With that behind us, let’s talk about how a FIRE saver can maximize the value of putting their day to day spending on a credit card. First on the list: cash-back rewards, where the card issuer gives you either cash back or a credit on future statements as a percentage of the money you’ve spent on the card. Not a bad way to save some money on future statements – but, as we’ll discuss further below, the return on these is generally less than the other types of rewards that credit cards may offer.
The second is where the card issuer partners with another company and offers rewards with that company for spending on the card, often referred to as a “co-branded” credit card. Among the most common examples of this are partnerships with hotels and airlines, where spending on the credit card earns points or miles in the partner’s rewards program. You may be familiar with credit cards with a Delta or Marriott logo on them, but that are issued by American Express.
Travel companies are not the only ones who issue co-branded cards – you’ve undoubtedly seen or been asked at retail stores if you want to sign up for their cards. Non-travel co-branded cards typically fall into category 1 above, giving you cash, statement credits, and/or discounts on purchases with the retailer.
Travel-related cards tend to have a better return on spending and therefore receive more of the attention. With a co-branded travel card, the card holder generally earns points that can be redeemed with the hotel or airline for whatever they offer with them, be it free nights, free flights, or other perks. For the credit card user who travels and prefers a particular hotel or airline, co-branded travel cards are not a bad option to lower the out of pocket cost of staying in a particular hotel or flying on a particular airline.
On top of the points or miles offered, sometimes the issuer hands out perks just for holding their credit card. You may have seen this in action at the airport, where holders of the airline’s credit card can check a free bag or board the plane earlier. These little perks and incentives, particularly those that save you money, can add up over time, depending on how much you travel and how often you’re able to stick with your preferred hotel or airline.
Transferable Rewards
The final category is my favorite: transferable rewards currencies. The major credit card issuers do a good amount of advertising, so you may have seen ads for rewards programs by American Express, Chase, Citi, Capital One, and others. Unlike the co-branded cards with a specific hotel or airline, these programs give you points that you can use in a variety of ways.
One option to redeem points is to exchange them directly for products offered by the issuer. American Express, for example, has what amounts to a store where you can shop for goods in exchange for points. It’s like exchanging tickets won at an arcade for a prize. Another option you might see is to use points for a statement credit, reducing your out of pocket costs for your daily spending based on how much spending you’ve done in the past.
The third category I’ll discuss is what I find to be the most lucrative, and that is transferring the credit card points to other rewards programs and using them for travel. Here’s how this differs from the co-branded travel cards discussed above. The credit card rewards points are transferable to a number of different hotel/airline/car rental companies at a specified conversion rate, in contrast to a co-branded card that only gets you points in the particular hotel or airline whose name graces the card (sometimes you can exchange those for others, but the conversion rates tend to be less favorable).
The benefit of transferable rewards points is that you can mix and match between different programs, giving you more options than if you’re beholden to a particular travel brand. This flexibility opens up more options in terms of destinations and travel brands. Moreover, it gives you the option to shop around and figure out how you can get where and what you want for the least number of points, allowing you to stretch them as far as your imagination can handle. I’ve also found that transferable credit card points tend to have some of the best conversion rates for spending than the other credit card options. Done right, you can extract the most value per point from these transferable currencies than the cash back option, provided that you value travel more than the cash in your pocket.
The mechanics of how best to do all of this are best left elsewhere for now, but a simple online search can open up an entire world of sources dedicated to this topic. Although it can take some time to master the process, when executed with precision you can get some great value, which is why I see credit cards as beneficial to a FIRE saver or early retiree.
For one, credit cards rewards – assuming you maximize their value – can help you find some balance in your life in the years you’re saving for early retirement. Since you’re earning rewards for spending that (theoretically) you’d be doing anyway, credit card perks can allow you the option to travel without having to spend as much money, leaving you with more to save and invest. As I discuss frequently, saving for FIRE is all about finding the right balance, and allowing yourself to do things other than sitting around clipping coupons is an important part of that. Credit card perks can act as an integral part in saving money while still living your life.
This of course assumes that you use the cards correctly. I can’t stress enough that carrying a balance will eat into your savings – big time. Interest rates on credit cards can run in the neighborhood of 20-odd percent. Each is different, so do your research, but, to put it bluntly, credit cards are not an option to free up cash for investing. Barring some streak of crazy market luck, it’s almost guaranteed that you’ll never earn a market return that exceeds or even approaches the interest you’ll pay on a credit card balance. When you’re budgeting, make sure you have enough cash to pay off your cards, then invest – in that order. Any rewards you get from a card will not outweigh interest charges if you carry a balance.
Another thing to consider is the fee associated with a number of cards, particularly the higher-end cards that tend to offer the best rewards programs. Fees for some cards can be up to several hundred dollars per year, meaning that you have to evaluate whether you get more out of them than you pay in fees. If you spend enough each year to earn yourself $2,500 in travel, then sure, that outweighs a $500 fee, but the calculation is different for everyone.
Another thing to keep in mind when assessing the value of the yearly fee is the other perks that the card gives you. Some cards will grant you access to airline lounges, hotel lounges, preferred access to rental cars, and other things of that nature. If having those perks improves your travel (and you travel enough to make use of them), these intangible benefits can definitely land on the value side of your analysis. For example, if the job you’re using to save for FIRE requires you to travel, having lounge access might ease the otherwise unpleasant time you’d spend at the airport.
But remember, like with everything in the FIRE equation, it has to be right for you. If you find it more valuable than the opportunity cost of investing the yearly fee, then by all means, go for it. While you’re in retirement, credit cards can also save you a bundle on traveling, and with more time on your hands (hopefully), you might be able to figure out how best to maximize their value.
Conclusion
To wrap it up, credit cards that offer rewards can give you great value, so long as you use them prudently and make the most out of what they offer. As I mentioned, the above is an extremely high-level overview – there’s far more nuance to all of this, including how best to maximize the value of cards. I’d implore you, as always, to do your research before undertaking any type of financial decision, and to evaluate the costs of using a card against the benefits you can obtain.
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