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Four Rules to Win at the Credit Card Rewards Game

Michael Berg, CreditCards.com
Tuesday, 29 Jun 2010 | 12:13 PM ET

It sounds like a can't-lose proposition: Sign up for a rewards credit card, then charge all of your monthly expenses to rack up the points. All you need to do is just make sure you pay off the card when the bill comes due, and you'll soon be cashing in those points for travel, products, even money back. What could go wrong?

More than you realize, according to Gail Cunningham, vice president for public relations at the National Foundation for Credit Counseling (NFCC). After 24 years in the credit counseling industry, she's seen many well-intentioned people try the strategy ... and fail miserably. "You've got to know yourself," she says. "You can win at the rewards game, but you've got to understand the rules."

Online shopping with a credit card.
Online shopping with a credit card.

If you think you've got what it takes to "play the rewards game," these four rules can help, while keeping your all-important credit score intact.

Rule No. 1: Decide if ratcheting up your credit card use is right for you
Credit cards are not for everyone. Diane Yunek, membership coordinator for the DeKalb County Farm Bureau in Sycamore, Ill., and her husband gave up credit cards completely five years ago and swears they'll never be tempted back by points. "It's the best feeling to know you don't have the end-of-the-month payment over your head," she says.

"Before, we used our credit cards way too much. We were tired of making monthly payments, and just as we'd get them down, we would use them again. Now, we save for our vacations, Christmas, pretty much everything."

Others, however, handle it without major incident. Laura Marlowe, a magazine production manager from Phoenix, has two rewards cards and has been chasing points for about five years. "I put most of my living expenses on the cards," she says. "One I use most and one my husband uses most, which helps me keep track of both of our spending. I use the statements to adjust our budget. We've gotten a ton of things with rewards points."

Rule 2: Do your homework
Even if you get bombarded with credit card offers in the mail, it's no guarantee you're a rewards candidate. "It's likely you're not going to get a rewards card unless you have the best of credit," says Cunningham. "I suggest going to a site like CreditCards.com and researching which credit card issuers are more likely to say yes to your application, because you don't want to have too many inquiries on your credit report. That lowers your credit score." To research, use the menu bar at the left, where you can search options by type of card or your credit quality.

Also key is picking a card that has rewards points that you'll really use, says Marlowe."Make sure it's something you need, that will actually save you money. I didn't want airline miles, as I can never manage to use the ones I have, so instead I picked a card that lets you decide on a gift card from a selection of 50 different stores," says Marlowe.

Certain stores give you more credit than the actual value of the rewards points, she adds. "For instance, if you have $25 in credit, you'll get a gift card for $30, so you receive even more value."

Rule 3: Read the fine print
While the marketing materials will tout all the point-capturing opportunities of the card, often they come with an asterisk. "Digging a little deeper into rewards cards, I was surprised to find that you may only get the benefit from certain categories during certain months," Cunningham says. "For example, you may not always earn points for grocery charges -- only in designated months. So if you think, 'I've got a big family and a huge grocery bill. I'm going to earn tremendous rewards points,' it's probably not going to happen as you expect."

Cunningham also points out another consideration: an annual fee, which could negate the benefits of the points you accrue. "That's just another nail in the coffin for the person who doesn't pay his or her bill in full, and owes interest on a balance," she says.

Rule 4: Once you have a card, use it wisely
If you're going to charge all your monthly expenses to a rewards card, you absolutely must commit to paying off your bill every month. Any balance creep will wipe out the benefits of the points, because you'll be paying interest charges that you wouldn't have had if you instead paid with debit or cash. It takes supreme financial fortitude, but a few tricks can help, too.

"Every time you charge something, write it down in your check register, just as though you've written a check for it and the money's already come out," Cunningham says. "That way the money should still be in your account when the bill arrives."

Cunningham also suggests paying at least a portion of your bill whenever you get a paycheck, not just when it comes due. That way, the accumulated total isn't so daunting.

Keeping (your) score
Although it's not for everyone, racking up the rewards is possible ... and, dare we say, rewarding. Louis Raphael, a San Francisco-based computer programmer by day, drummer by night for rock band Stiletto Ghetto, has two rewards cards "and a FICO score that's off the charts." He says the pursuit of points has been a resounding success.

"I charge everything I can on my cards. I wish I could charge my rent, too, but I can't, so that's the only expense I pay by check," Raphael says. "The only pitfall I can think of is not being responsible for keeping up with the balance, or not paying it off at the end of the month. But with online banking, that shouldn't be an issue, since you can check your balance daily."

Taking that advice will help protect your credit score, which is made up of five factors. "The highest rated element of the credit scoring model is simply paying your bills on time -- that counts for 35 percent," Cunningham says. "The second-highest weighted element, at 30 percent, is not using too much of your available credit. You never want to use more than 30 percent of your total available credit. The credit scoring model likes it even better if you don't use more than 30 percent of each card." For instance, if you have no balance on one card, 10 percent of the available credit charged on a second card, but 50 percent on a third, it won't be as good for your score as if you had 20 percent on each of the three cards.

With that in mind, if you're ready for the rewards game, play smart, follow these four rules, and chances are you'll come out a winner.