Can you do better than 2% back on credit card spending?

Inspired by the recent really-big table of credit card rewards, I want to start a discussion about how you can obtain a superior level of organic return on credit card spending, and why that can be better than 2%, and should be for many people. (Update: this is intended as a primer. The comments supply many additional ideas.)

Here are some ground rules:

  • This advice applies to people with established credit history, and a FICO credit score in the 700s with several lines of credit to their name (student loans, car loan, credit cards, etc.) including several $thousand in active credit card limit. If you are on your first credit card, then you are not yet ready to optimize returns.

  • I am not describing/advocating churning, as that (generally…) involves “manufactured spending” to artificially increase apparent credit card spending; claiming purported “businesses”; and exceeding five credit card applications / year. You can do that if you want to, but this is not about that.

  • This considers only straight cash / statement credit rewards. Travel rewards can be better than cash in some ways, but not everybody wants to travel.

Clear on that? OK, with that in mind, here are a few things you can / should do, to get better than 2% cash return on credit card spending.

First and most important, periodically apply for new cards that provide an initial spend bonus, which increases your effective return rate significantly. “Periodically” means every six months to one year. “Significantly” works out to something like these examples:

  • Suppose you spend $6,000/year on credit cards. Food, gas, cell phone and internet, household stuff. If you get 2% cash back, that’s $120. If you get 1.5% back with a $150 initial spending reward, that’s $240 with one card, and $360 if you get a second, 1% card. So we’re at 4% or even 6% without trying very hard.

  • Suppose you spend $12,000. Higher expenses for a couple, or you just have more expensive taste, with entertainment and travel expenses. Now you can qualify for higher levels of initial spend bonuses. You could make an extra $500 with one card, or ~$1000 with two cards in some cases. Instead of 2% rewards of $240, now you are looking at $620 or even $1000+, so 5% to 9%+. That’s a lotta percent. (See below on annual fees.)

  • Suppose you spend way more than that, e.g. you run work expenses through a personal card, or can use your card for rent. In that case, your effective return calculation will vary. You can apply these techniques to the part of your spending where it makes sense, and then use 2% cards for everything else; you will still do better than if you did just one card.

Secondly, now that you have several active credit cards, you use cards with differential reward categories if you want to. (You don’t have to. It’s a choice.) Some cards will give you (e.g.) 3% back always on certain things, or 5% back for a few months out of the year. If you can keep track of that, you can do better than 2% on that spending.

Thirdly, you can selectively get cards with an annual fee if the initial spend bonus pays for it. It’s often the case that the initial spend bonus is much higher than the annual fee. Some cards with a fee will defer the fee for the first year, and in later years, you can downgrade to a card with no fee, or just cancel the card.

You probably know all this at some level, but haven’t strongly considered it for yourself, because you are worried about having /managing too many cards or hurting your credit score. Both of those are individual decisions, but there is also some misinformation out there. Your credit is not dinged by having too many cards, and over time, it helps. Opening a new card can cause a small credit score drop, larger if you have less history, but you should recover any drop within a short period of time as you create more good history. Lower average age of accounts is typically balanced by higher available credit. Even people that do much more than we are talking about here routinely maintain credit scores well above 760. (My score is above 800, but I have a lot of history. )

You can also close cards as you open new ones to keep your total cards open to a tasteful level. That doesn’t hurt your FICO age of accounts in any meaningful way (though it will show up in a CreditKarma Vantage score), but it could affect your available credit. Some companies will let you reallocate credit between their cards. You can also just keep old cards in the sock drawer, after product-changing any annual-fee cards where that’s an option. One advantage of closing cards is you can apply for them again in the future, and get the bonus again after a couple of years.

Cards that work well for this strategy include the following (these exclude business cards, cards with over $100 fee, and cards not providing statement credit):

CardBonusSpending (3 mos)Base rewardsAnnual FeeComments
Chase Freedom Unlimited$150$5001.5%0Easier to get
BofA Cash Rewards$150$5001.0%03%/2% sometimes
CapitalOne Quicksilver$150$5001.5%0Harder to get?
US Bank Cash+$150$5001.0%05%/2% sometimes
Chase Freedom$150$5001.0%0Rotating 5% categories
Wells Fargo Cashwise$200$10001.5%0Harder to get
Amex Blue Cash Everyday$150$10001.0%03%/2% sometimes
Wells Fargo Amex Propel$300$30001.0%03% sometimes
Amex Blue Cash Preferred$200$10001.0%$956%/3% sometimes
Capital One Savor$500$30001.0%$954%/2% sometimes; fee waiver
BofA Premium Rewards$500$30001.5%$952% sometimes
Chase Sapphire Preferred$600$40001.0%$952% sometimes

This list is not exhaustive, and is subject to change. You won’t run out of cards anytime soon if you only get one or two cards / year. The Discover IT doubling of first-year cashback bonus is also worth looking into, but hard to describe in concrete dollar terms.

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