One of the simplest ways of generating passive income is through using cash-back and points credit cards. They are simple to install, convenient to use, and the reward money can be hefty—especially if you are astute in terms of the card’s nature and usage.
To maximize your use of your cash-back and points cards, you need to have a solid strategy. We will show you here in this article how to do it.
Cash-Back vs Points Cards: What’s the Difference?
Despite the terminology being widely used interchangeably, understanding the difference between cash-back and points cards is the beginning of choosing the correct one for you.
Cash-Back Credit Cards
By name, it can be seen that cash-back credit cards reward you with money when you make a purchase. Others check or debit cards reward you similarly on certain purchases, but for this article, let us consider cash-back credit cards and points cards.
Cash-back cards typically offer you a percentage of cash back on your buying. Some have a flat rate, while others have various awards based on the type of purchase. To gain the most from these cards, you will have to understand your spending habits so that you can choose the right one.
Points Cards
Points cards are similar to cash-back cards, except that instead of cash, they provide points. These points can be exchanged for:
- Gift vouchers to shop at particular shops
- Discount vouchers at most shops
- Travel points (e.g., Avios or air miles)
The sole distinction is how you may exchange the rewards: cash-back awards you money directly, while points cards are spent in exchanging points for items or services.
How to Optimize Your Passive Income with Cash-Back and Points Cards
To get the most from your credit cards, follow these steps:
Analyze Your Spending Habits
Begin by taking inventory of where you already have money tied up. Take notes of everywhere that you spend money with your credit cards. Categorize these places into lists such as food from a store, meals in restaurants, or vacations. It will help you determine where you can maximize the rewards.
Recognize Non-Credit Card Spending
Check recurring monthly charges you’re not paying for with your credit card too, such as purchasing groceries or gasoline. Consider the option of shifting these payments to a credit card if it is reasonable. Having these purchases in your list will provide you with a better picture about your spending overall and enable you to choose the most appropriate rewards card.
Do a Review of Your Spending Habits
Look at your list and determine which categories make up the majority of your spending. Are groceries or gas your biggest expenses? If so, you’ll want to focus on cards that offer higher rewards in these categories. If your spending is more balanced, consider cards with bonus categories or rotating offers that suit your lifestyle.
Cash-Back vs Points: Which is Better?
Let’s consider two examples to help guide you in deciding between a cash-back or points card.
Spending $1,000 a Month on a Cash-Back Card
Sign-up bonus: 5% cash back on the first $1,000 spent during the first 3 months.
Ongoing cash back: 1.5% on all purchases thereafter.
In this scenario, you’ll earn:
- $50 during the first 3 months (5% of $1,000)
- $135 for the remaining $9,000 during the year (1.5% of $9,000)
Total yearly cash back: $185.
Spending $1,000 per Month on a Points Card
Sign-up bonus: 20,000 points for spending $1,000 in the first 90 days.
Ongoing points: 1 point for every $1 spent.
Value of each point: 1 point = $0.01.
In this case, you’ll earn:
- 20,000 bonus points from the sign-up offer
- 12,000 points for your $12,000 in spending (1 point per $1)
Total annual points: 32,000 points, worth $320 (32,000 x $0.01).
As you can see, the points card provides a higher yield, with $320 in rewards versus $185 for the cash-back card.
Choosing the Most Rewarding Card for Your Spending
Having learned about your spending habits, it is time to find out the card that will reward you most. In case you spend considerably on gas or groceries, choose cards that provide higher rewards for those categories.
Some cards, like the Citi Custom Cash Card, reward more in the rotating categories, so they’re ideal for individuals whose spending patterns change from month to month.
Make sure you compare offers adequately and consider the following factors:
- Sign-up bonus: The majority of cards offer an incentive for hitting a minimum spend in the first few months. Check whether you’ll be able to meet that mark.
- Annual fee: Some cards have an annual fee after the first year. If the rewards are more than the cost, it may still be worth selecting.
- Bonus categories: Some cards have bonus rewards for specific purchases, like technology or travel. They can actually bulk out your rewards, but only if they match your spending.
Key Considerations
- Points vs. Cash: Points often can’t be exchanged for an actual cash rebate, but may be traded for merchandise or other services. Cash-back cards could be a better choice if you prefer cold hard cash.
- Minimum spend: Any card will often have a minimum spend requirement before you qualify to receive the claimed rewards. Your normal monthly outlays must cover the minimum in order to comply.
- Sign-up bonus: Utilize sign-up bonuses, but be certain you can fulfill the spending demands. Avoid overspending to collect rewards.
- Flat-rate cash back: If you prefer simplicity, look for a flat-rate cash-back card that offers a flat percentage on all purchases. For example, if you have a 1.5% cash-back rate and $2,000 monthly spending, you’d receive $30 per month or $360 annually.
Tips to Maximize Your Rewards
- Look for Bonus Offers: When making high-ticket items (like a TV or a trip), check if your card offers bonus rewards in that category. For example, if you have 10% cash back on electronics during the month, you would earn $80 on an $800 TV purchase.
- Pay Your Bill in Full: Pay your credit card bill in full to avoid paying interest charges. The objective is to collect rewards, not to pay extra in interest and fees.
- Use Rotating Categories: Rotating bonus categories are available on many cards, with a new category every quarter. Use them, but only if they align with your intended purchases.
How Rewards Are Paid Out
Cash-back rewards are paid out in one of two ways:
- Statement credit: The rewards are credited to your credit card account.
- Direct deposit: For some cards, you can deposit your rewards directly into a checking or savings account.
Points usually are credited to a points account, in which they have to be redeemed in the form of products or services.
Smart Uses for Your Cash-Back Rewards
Once you’ve earned cash-back rewards, this is how you might use them:
- For Loved Ones: Invest your rewards in savings accounts or high-interest bonds to gain a return.
- For Retirement: Invest your rewards in dividend stocks, using your passive income over time.
- For an Abundant Lifestyle: Use rewards for hobbies, vacations, or entertainment that add more to your life.
Points rewards are most ideal for traveling, where you can use your points to book your flights and accommodations.
Conclusion
Cash-back and points credit cards offer an excellent source of passive income from your daily expenditure. By choosing the right card, knowing your spending patterns, and optimizing your rewards, you can increase your income significantly.
If you’re not already using a rewards card, now is the time to start. Research the best cards for your spending patterns and make sure to take full advantage of any sign-up bonuses and rotating categories. Just remember to avoid carrying a balance to keep your rewards truly passive.
