Americans are addicted to earning rewards on their credit cards. According to a recent survey by Fidelity, 55% of cardholders own a rewards card. The most popular reward is cash back, chosen by 63% of the people surveyed. However, frequent flier miles and points are also very popular. How can you decide which credit card is right for you?
In my banking career, I have designed, launched and managed many rewards cards over the years. And cash back cards regularly delivered the best value to the majority of customers. However, if you are willing to do a bit of work, mile and point credit cards can offer even better value. You just have to be honest with yourself: are you willing to do a little extra work to get a bigger return?
Where Do The Rewards Come From?
Every time you use your credit card, the merchant pays a fee (called interchange), most of which goes to your bank. The fee structure is incredibly complex, but it averages 2% for Visa V +1% and MasterCard MA +0.3%, and a little bit higher for American Express AXP -0.35%.
Your goal should be to get as much of that interchange back as possible. Just consider it a rebate on your everyday spending.
You Should Earn At Least 2%
Last year, Citi launched Double Cash, the first credit card that pays 2% cash back on all spend. You earn 1% when you make the transaction. If you pay your bill on time, you will earn another 1% on your payment. There is no annual fee and no cap to the cash back that you earn. If you spend $2,000 per month on your credit card, you can earn $480 of cash during a year.
This card is the gold standard of simplicity and value. If you have a cash back card and earn less than 2%, it would be wise to switch to Citi.