Cash Back or Free Flights? Here’s How to Get the Most Out of Your Credit Card Rewards

Editor’s Note: This story originally appeared on Penny Hoarder.

Ever wanted to shave $50 off your credit card balance? Get a free gift card to your favorite store? Or take a flight to Europe without paying a penny?

All of that is possible with credit card rewards. If you have strong enough credit to qualify for one or more rewards credit cards — usually cash-back credit cards or travel credit cards — you can get great rewards for everyday spending.

We’ll show you how to maximize your credit card rewards without taking on high-interest credit card debt.

How Rewards Credit Cards Work

There are two major types of credit card rewards programs:

• Money back
• Travel (points or miles)

How Cash Back Credit Cards Work

With cash back credit cards, you earn back a percentage of what you spend with every swipe.

Low rate cards typically pay between 1% and 2% on all purchases while other cards offer special, higher cash back rates on certain categories of spending, such as groceries, dining, gas or entertainment. Some cards pay up to 6% on things like groceries and streaming services.

You can also use the cash back as a statement credit to lower your credit card bill. Some cards will also allow you to redeem rewards for gift card cash back or direct deposit to your bank account, or redeem your rewards directly when you shop online.

You can also get a sign-up bonus when you open a credit card. (Learn more about maximizing sign-up bonuses by using a credit card.)

How Travel Credit Cards (Points and Miles) Work

With travel credit cards, you typically earn points or miles with each purchase.

Similar to cash back credit cards, travel credit cards may offer lower rates or may offer different levels of points or miles for different types of purchases, often rewarding travel purchases (such as airfare and lodging) with greater levels of points or miles.

Travel credit cards usually offer several benefits, such as:

• Travel insurance
• Lost luggage insurance
• There are no foreign transaction fees
• Cash credits for TSA PreCheck and/or Global Entry
• Exclusive airport lounge access

Besides standard travel credit cards, you can open a co-branded rewards credit card with an airline or hotel chain to earn extra special rewards.

Each travel credit card program is different, but in general, you can use points or miles for flights, hotels and other travel-related expenses. Some credit card issuers have their own travel sites where you can earn rewards.

You can also transfer points or miles to various partners (such as airlines or car rental agencies), where the reward points or miles may roll over.

Some travel cards may also allow you to redeem your points or miles for gift cards or cash back for statement credits. However, you’ll usually get less value if you use your points for this instead of redeeming them for travel.

Like cash back credit cards, travel credit cards often come with sign-up bonuses.

How to Accumulate Rewards With Responsibility

Credit card rewards can help you lower your monthly credit card debt, pay for your travel and more. But to get the most out of your credit card rewards, you have to be strategic about how you spend the money.

• Choose the card that is right for you. Research all the best cash back credit cards and the best credit cards to find out which one is the best fit for your lifestyle. For example, if you drive a lot to work or school, choose a cash-back card that pays extra for gas. Or if you’re saving for your honeymoon or big purchase, choose one of the best credit cards to get welcome bonuses.
• Pay attention to the refund/reward sections: If your card offers higher cash back on certain categories like groceries, don’t forget to use that card when you go shopping. Same with travel cards. Know before you start planning a trip if you get extra points or miles for booking certain hotels or airlines.
• Cover all your bases. If you can manage multiple credit cards responsibly, consider applying for multiple rewards credit cards (over time, that is) to get higher rewards no matter what you swipe your card for: airline tickets, hotels, groceries, cell phone, streaming services, gas — you name it.
• Don’t overspend. Before making any purchase, ask yourself, “Would I buy this if I didn’t get the rewards?” If the answer is no, resist the urge to spend money. After all, the value of the rewards will never exceed the cost of your purchase – only buy what you need.

How to Use Rewards Wisely

Achieving credit rewards takes a careful strategy. You need to spend enough money on one card to earn the sign-up bonus within the specified time frame, know which card to swipe which type of purchase and make sure you pay each card in full every month to avoid interest.

But using credit card rewards requires a careful strategy to make sure you get the most out of them. Here’s how to maximize your credit card rewards:

• Avoid using low value. You may be able to get special merchandise or gift cards with your credit card rewards, but that may not be the best value strategy — check your credit card issuer’s promotions for gift cards that are “on sale.”
• Focus on higher value usage instead: With cash back cards, statement credits are often the way to go to get the most out of your rewards. With travel credit cards, booking through a credit card portal or transferring points or miles from a partner portal is often the best way to extend your rewards further.
• View expiration dates: Hanging on to points or miles while you wait for the best time to book a trip can be smart — if you’re careful. Most rewards have expiration dates, so be sure to redeem yours before they’re gone.

Common Mistakes to Avoid

If you have credit card rewards in your wallet, you can rack up some savings through cash back programs or travel and miles points. But you can also do a lot of damage to your money if you are not careful.

Here are some ways to avoid common credit card mistakes.

Spending More to Get Rewards

The biggest risk with credit card rewards is overspending to get the reward. Make a budget and stick to it. Only swipe your card when you need to make a purchase, regardless of whether you’re earning rewards or not.

Not Staying on Top of Payments

Pay off your card in full every month to avoid accruing interest. If not, the interest costs can outweigh any rewards you earn.

Forgetting Annual Fees

Each year, before paying the annual fee on a rewards credit card, do the math to make sure the rewards you’re earning still match the annual fee.

And remember: Rewards don’t just have to pay an annual fee. The rewards on a card with an annual fee need to be so valuable that, even after paying the fee, they still exceed the rewards you would earn on a card with no annual fee.

Losing Your Points

Some people like to accumulate credit card rewards to save for one big purchase, but this can be dangerous for several reasons:

• Inflation: In today’s economy, the cost of goods and services is almost always rising. What costs $1 this month may cost $1.05 next month. But credit card rewards sitting in your account don’t grow to keep pace with inflation. As each month goes by, the rewards you’ve earned will get progressively better.
• Depreciation: The Consumer Financial Protection Bureau warns that credit card issuers can “devalue” points over time. Redemption policies may change over the years; what used to cost 1,000 miles or points may suddenly cost 1,100, for example.
• Expiration: In some cases, credit card rewards may expire if not used within a certain period.
• Missed payments: Rewards are not just an incentive to spend more money; credit card companies use them as an incentive to pay on time. Depending on your contract, a missed payment may trigger the forfeiture of rewards.

Make the Most of Your Rewards Credit Cards

Rewards credit cards can make a big difference in your finances if you treat cards responsibly, don’t overspend, and make strategic decisions when redeeming your cash back, points or miles.

Treat your rewards cards as a bonus — not an incentive to overspend. And don’t keep your cards on autopilot. Regularly review fees and rewards and compare competing credit cards to make sure you have the best card for your needs.