Combine Credit Cards To Earn Up To 4% In Rewards

Credit card companies generally charge merchants something like 2% – 2.5% in interchange fees or swipe fees, plus they’re currently under pressure by Congress to reduce these fees. So it should stand to reason that paying you more than 2% back on your rewards card would start to eat into their profit margins. This is why the “industry standard” amongst rewards cards is to pay you around 1% back, with 2% cards being the exception.

Well it turns out that if you “play your cards” right, you could actually eke out something closer to 4%! Following are some tips from a credit card nerd on how to game the system.

Don’t be afraid to leverage your good credit and take advantage of loopholes that exist with regards to credit cards. Your credit card company wants to skimp on the rewards, but also wants to trick you into thinking you’re getting a much better deal. That way, they can profit every time you swipe the card, even though you pay your balance off every month and don’t pay interest.

But you can “beat the system” in two ways:

• Capitalize on cards offering “teaser” categories, like 5% on gas.
• Sign up for rewards programs that serves as loss-leader marketing for other products.

Combine Credit Cards To Earn Up To 4% In Rewards

Loophole #1: Take advantage of cards that offer a generous “teaser” reward category.
Some common derivatives of this “teaser” credit card include: Earn 5% on gas, earn 5% on restaurants, or earn 3% on gas and groceries, all while earning 1% everywhere else. Card issuers count on users being enticed by the big numbers and hope that their customers don’t actually do the math to determine how much of their spending will actually fall into these categories. The issuers assume that the average person will end up earning less than 1.5% rewards over all, so they still make good money despite the teaser.

But if you are smart about combining a few cards with different teaser categories, you can really milk each 3% – 5% card to the fullest, and drastically increase how much of your spending is earning you maximum rewards.

Some cards that offer these categories include:

Credit Card Rewards Type Notes Citi Dividend Platinum Select MasterCard Cash Back Up to 5% cash back, No annual fee Chase Freedom(SM) Visa – $100 Bonus Cash Back $100 Bonus, 5% cash back, No annual fee Citi ThankYou Preferred Card Point Rewards Rewards card, No annual fee

Note that the terms for these cards may be subject to change, and we’ve listed them for illustrative purposes.

Loophole #2: Take advantage of offers where product marketing is more important to the issuer than profitability.
Some companies issue cards that pay higher reward rates than couldn’t possibly be profitable. This is meant to lure you into buying something else from them that is much higher margin, so in the end they still make money off of you.

Almost every card that pays 2% or more in rewards has such a story:

• GM and Subaru are more concerned about customer loyalty and car sales than credit card rewards, and thus are the only companies who offer a flat 3% reward rate.
• Schwab and Fidelity are in the money management business, so their model is to charge you fees on the money you have invested, plus fat commissions on trades. As you can imagine, they are more than happy to pay you 2% rewards to get your business and loyalty.

Don’t Be Afraid To Carry American Express and Discover Cards!

It’s true that Amex and Discover aren’t accepted everywhere. But if you’re going to carry more than one card anyway, you should definitely add one of these to your arsenal. The rewards you get from these two cards generally pay above-average rewards, because they charge merchants higher fees than Visa or MasterCard every time you swipe. This is also precisely why some stores won’t accept them, but that’s not your problem.

The “Knockout Combo” – How To Score 4% Back

• Get 5% on all your gas and grocery purchases with a rewards card like the AmEx Blue Cash. Caveats: Bonus rate kicks in after you’ve spent a certain amount, and may not apply at warehouse stores like Costco.
• Get 5% on dining, movies, music, and restaurants with Citi Forward (SM), for the first $15,000 of spending in a year. I’ve heard unconfirmed rumors that all Amazon.com purchases are considered “books”, which is even more valuable.
• Get 5% on revolving groups of special categories with Chase Freedom and/or Discover More. For example –- from July to September 2010, earn 5% on gas, car rentals, hotels, and airfare for your summer travel.
• For everything else, use a 3% GM or Subaru card if you think you might buy one of their cars, or choose from one of the 2% cards listed on our aforementioned rewards page.

Please note that this is just an example and rates change quite a bit and can be pretty dynamic. In my case, each year I spend over a third of my credit card bill on restaurants and bars using Citi Forward (thank you, Manhattan). Another third goes to other 5% categories like gas, groceries & seasonal items using Amex Blue Cash, Chase Freedom, and Discover More. The final third goes towards miscellaneous items on my Fidelity Retirement Rewards card.

So what’s my net? 1/3 * 5% + 1/3 * 5% + 1/3 * 2% = 4%

If you have the original AmEx Blue Cash card, note that it only starts paying 5% on gas and groceries after $6,500 per year in spending. It’s the rewards card I own, and when I consider what it gives me, my total is actually closer to 3.7%. However, if I were in the market for a GM or Subaru car, I could make up the difference by using one of their cards on the remaining 1/3 of my spending.

Now get busy exploiting and save yourself some dough!

Tim Chen of NerdWallet was formerly a hedge fund analyst specializing in credit card networks and technology companies before becoming a victim of the financial meltdown. NerdWallet is the Kayak for credit card search, and seeks to become the number one source for unbiased online credit card information.

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