How can you use travel rewards cards on a budget?
It is possible to use credit cards for maximum travel rewards without going broke?
If you have no current credit card balance, a strategy in place, and a good credit score, you can make travel rewards cards work for you. Do you like to travel but hate the cost? At some point, the pandemic will be under control and we will be able to travel again. Rewards points can bring the price tag way down. However, it is very important to plan your purchases carefully.
Pack your bags without losing your shirt
Credit card companies are not benevolent, so if they are giving things away, it is a hook to get consumers to spend. Study after study has found that we spend more when we use credit cards. You have to overcome marketing, habits, and psychology to make this work for you. How to do this:
- Start with a $0 balance
- Have a budget and stick to it
- Use the card for normal spending
- Pay the balance in full every month
- Treat the credit card EXACTLY like cash
Dipping our toe in- travel rewards cards on a budget
We just paid off $25,000 in credit card debt, and of course, we want to be careful to not be in that position again. But we are not worried about falling into debt again. We ran up those credit cards during a time of low income and job insecurity. We are now making 3.5 times the amount of money we were making then, with very little lifestyle creep, a better understanding of our financial situation, and a healthy savings cushion. However, we know how easy it is to get sucked into the muck of credit card debt, and we are actively guarding against it.
We got two new credit cards with travel rewards points. We live in the Pacific Northwest and really want to go to Alaska and maybe Hawaii next year, so we decided to get the Alaska Airlines card, which is giving 50,000 free points if you spend $2000 in the first 90 days that you have the card. They offer a companion fare on your card anniversary for $121 and a few other perks. So we decided that is a fairly low threshold and we like flying Alaska, so we decided to go for it.
We were thinking about what we would use for the minimum spend and how best to maximize our rewards points when another offer came across our desk: Chase Sapphire is offering 80,000 points when you spend $4000 in the first 3 months after opening. We had planned to spread the offers out, but this is only the second time in history that they have offered such a great deal. So we decided to jump on it.
I know that credit card companies hire a lot of people to try to convince me to part with my money. Before going into this, we needed a rock-solid plan to fight the seduction of credit. I will walk you through the 5 steps that will help you win the travel rewards card game.
1. Get credit cards to $0
Do not start doing credit card rewards programs until you have all existing cards paid off and you have a strong commitment to pay off balances in full each month.
2. Have a budget and stick to it
This is both obvious and difficult enough that it must be stated clearly. To earn free travel and do this well, you have to be disciplined and organized. This doesn’t happen on its own as demonstrated by the fact that most people end up spending more than normal when they sign up for credit rewards. But if done correctly, it can render hundreds or thousands of dollars in rewards. Those rewards basically work out to tax-free money.
Rewards are like money. Therefore, look at the rewards planning and implementation like a job. And sometimes with a job, you have things that you don’t want to do.
For a lot of us, budgeting is a thing we don’t want to do. However, it is vital to put guardrails around your spending to ensure you are not creeping into overspend territory. Budgeting and tracking your spending are critical to success.
3. Use the card for normal spending
Before you sign up for a credit card to get the sign-up bonus, read all the fine print! How much do you need to spend and how long do you have to spend it? Do your normal bills come within those spending guidelines? Do you have a big purchase planned in that time frame that can push you over the top?
IMPORTANT: The credit card company considers the introductory period to start when you are approved for the card, but you cannot start spending until you receive the card in the mail, which may take up to 10 business days, shrinking your 3-month spending period considerably.
Can you use a credit card to pay for the things you need to spend money on? If not, there are services like Plastiq that you can use, but you have to factor in the percentage they charge as well.
If you cannot make the minimum spend on your normal stuff, really think carefully about whether it is worth it. You can prepay things like insurance or utilities but only do this if you can pay the total outlay in cash that month. You can charge things for family or friends and have them pay you back, but only do this if you have a lot of trust that they will pay you back.
Due to our two card sign-ups, we have to spend $6000 in 3 months. So, how will we do it? Our groceries are about $1000 a month, so that is about half of it. We will pay our insurance and utilities with the cards and may pay ahead on some of those bills as needed. Additionally, we will cover annual fees with the cards during this time. We have a flex savings account for medical costs. We can purchase meds and pay for co-pays on the card and get reimbursed.
Although we are doing a no-spend year, we still want to prioritize travel as much as possible. We have a sinking fund for travel, $75 a paycheck. The Dude and I are planning to have a weekend getaway to the coast in April, do some camping over the summer, and possibly attend my sister’s vow renewal in Vegas this fall. All of these expenses are covered through our travel sinking fund, but we will first pay for it with our credit card and then pay it in full from the travel funds. The Alaska card gives additional points when paying for airfare with the card. We have to strategize around paying for rooms with cards, as there can be higher rewards for those as well. Cy is going to try to come home this summer and we have a fun fund for his travel. Again, this will be filtered through the card first.
We may set up our rent and income tax payments to go through our credit cards, but each of those charge a percentage of the total as a fee when using a credit card (similar to Plastiq), so it is a method of last resort. Same with student loan payments.
4. Pay the balance in full every month
I CANNOT STRESS THIS ENOUGH!!!
We already talked about paying off the cards before you start, the second part is to bring the balance to $0 at the end of each billing cycle.
The average American household spends almost $1300 a year in credit card interest. The lure of points and rewards is strong. I had an Old Navy Visa card and in order to get the really good sales and in-store rewards, I had to use the card. Which sounded like a great deal to me! I can save so much money! Except that I was consistently carrying a $3000 balance on the card, and it had a 25.99% interest rate!! I could have bought a lot of $6 tees in cash for what we were forking over in interest each year.
As long as you pay it off in full, you do not get charged any interest, only the annual fees. I am still learning about annual fees and how to maximize them, so I will do a post about them later. So far, Alaska waives the first year fee and Chase Sapphire Preferred is giving us a $50 grocery credit the first year, which cuts the fee in half. So we have time to figure out the annual fees. But first and foremost, pay your balances off in full each month.
5. Treat the credit card EXACTLY like cash
When using travel rewards cards on a budget, it is best to think of the credit card like a debit card. Pretend the money is coming directly from your bank account by taking the money directly out of your bank account!
The key to treating the credit card like cash is to remove the money owed from your account right away. We bank at a couple of different credit unions, and we are able to set up multiple savings accounts in them, all tied to our checking account. I check the bank account daily. It takes less than 5 minutes and gives me an idea of where our account is. Any time I spend money on a credit card, I will immediately go into my checking account and transfer that amount to a savings account that I have entitled “Credit card holding cell.” The money is out of the main account and the spending has been accounted for. Then,a few days before the credit card’s due date, I will move the amount back into the main checking account and pay the credit card in full. Because remember: this system works best if you pay the balances in full each month!!
Fun travel, the frugal and responsible way
This is all I know so far. I will keep writing as I learn more about choosing credit cards, maximizing spending opportunities and points usage, and keeping the whole thing afloat! But for now, I will just reiterate:
- Look at how much each card offers for a signup bonus, and think about how much you can comfortably put on a card within the initial period. Pay attention to the annual fee and the methods the card company uses to deflect that fee.
- Only start this when you have $0 in credit card balances
- Have a solid budget and revisit it regularly
- Use the card for normal spending and beware of spending creep
- Plan to pay each card off in full each month
- Use the card like cash
Traveling is much more fun when you don’t have to go into debt to do it.