How you spend, what you want to get out of your rewards and how much complexity you’re willing to manage are all things to take into consideration when choosing a credit card.
Welcome back! This is the second installment in a six-week quest to identify the best credit card for you. Whether you’re thinking of signing up for a new card, sorting through what you already have or even just browsing, I’m going to share my thought process and best practices for making sense of what can be a complicated, individual decision.
The steps are intended to be completed in order, but don’t worry if you missed part one. You can find it here. Now, on to round two!
Your second assignment
This week, we’re going to get really specific about how you spend money. This is important because different credit cards prioritize different spending categories (such as groceries, restaurants, travel, gas and so forth).
I want you to do the best you can to track down and categorize all of your spending from at least the past three months. If you’ve been using credit cards, debit cards or checks, reviewing those monthly statements will help. Some banks and budgeting apps even sort your transactions for you. Try to recall any cash transactions as best you can.
In my experience, this exercise will be really illuminating. I suggest going back at least three months because that starts to smooth out some of the ups and downs. If you want to put in a little more time and summarize six or 12 months of spending, that’s even better, but three months is a good starting point.
One caveat is that if you choose three months but you have a substantial recurring expense from a different time of the year, you’ll want to include that in your thought process. Just do the best you can.
What I learned
My family of four’s largest credit card spending category, by a wide margin, is groceries. (This reminds me of something else: It often doesn’t make sense to pay for certain things – like cars, mortgages, rent and property taxes – with credit cards because it’s either not allowed or there can be substantial processing fees. For this project, we want to focus on money that you could reasonably expect to put on a credit card without incurring extra fees. And we want you to be able to pay off these purchases before interest accrues.)
Over the past three months, my household’s average monthly grocery spending was almost $1,100. This is why my favorite credit card is the Blue Cash Preferred® Card from American Express. It gives 6% cash back on up to $6,000 in annual spending at U.S. supermarkets (then 1% cash back after that). My only regret is that the cap isn’t higher. It makes sense for me to pay this card’s $95 annual fee because a 6% return on $6,000 is $360 in cash back every year in exchange for money I would have spent anyway.
The card also gives 6% cash back on select streaming subscriptions, 3% cash back on transit and at U.S. gas stations and 1% on everything else. I appreciate its extended warranty and purchase protection coverage, too.
My family doesn’t eat out very much, but we still spent an average of $227 per month at restaurants over the past three months. My wife was shocked when I told her this. We order takeout roughly once a week, which adds up more than she realized, and even the occasional date night or meal with friends at a restaurant can be pricey.
I like how my Chase Freedom Flex℠ card gives 3% cash back on dining (among other benefits, such as 5% cash back on up to $1,500 in rotating quarterly categories that I need to activate, 5% cash back on travel booked through Chase, 5% cash back on Lyft rides through March 2022, 3% cash back at drugstores and 1% on everything else). It doesn’t even charge an annual fee.
Between my two credit cards, I get at least 3% cash back on several key categories. A good baseline for comparison’s sake is 2% cash back on purchases. Examples include the Wells Fargo Active Cash® Card which earns 2% cash rewards on purchases and the Citi® Double Cash Card (which technically gives 1% cash back when you make a purchase and another 1% when you pay it off). If you value simplicity, you could fare pretty well by using one of these no annual fee cash back cards on all of your purchases.
You could do even better if you mix and match different cards that emphasize different categories – and a card that gives a flat 2% cash back on everything could be your foundation. Some cards give more cash back on certain purchases, but since their baselines are often just 1% cash back, a 2% card would double your return on that spending. Next week, we’ll go deeper on the question of how many cards to have.
Focus on the big stuff
For now, your goal should be to identify your top spending categories. Consider specific stores, too, since many retail credit cards have improved their rewards offerings. If you’re loyal to a specific retailer, their credit card might offer a lot of useful benefits. One of my favorite retail credit cards is the Amazon Prime Rewards Visa Signature Card. It gives 5% cash back at Amazon.com and Whole Foods Market, 2% cash back at restaurants, gas stations and drugstores and 1% on all other purchases.
The same idea pertains to travel. If you often fly on the same airline or stay at the same hotel chain, one of their cobranded credit cards could be really beneficial. If you tend to spread your travel across various airlines and hotels, then a more general travel card would be a better fit. The Chase Sapphire Preferred Card is currently offering a sign-up bonus of 60,000 points when you spend $4,000 in the first three months along with new rewards categories and a variety of lucrative ways to put your points to work. If you don’t travel much, then cash back is the way to go.
It’s all about knowing yourself – how you spend, what you want to get out of your rewards and how much complexity you’re willing to manage. For now, focus on identifying your top spending categories. We’ll tackle the rest in more detail next week.
Have a question about credit cards? E-mail me at firstname.lastname@example.org and I’d be happy to help.
All information about the Amazon Prime Rewards Visa Signature Card has been collected independently by CreditCards.com and has not been reviewed or approved by the issuer.