How I Turned $75 Into $450

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Money in walletI got my first credit card 20 years ago, along with three strict rules that I've abided by ever since:

  1. Always pay the bill on time. Even one late payment can mar your credit record, and that blemish will linger there for years for all to see, including lenders, potential employers, landlords and insurers.
  2. Never carry a balance. If you can't afford to pay for something with cash, then put it back on the shelf unless you relish paying double-digit interest rates on the amount you borrow.
  3. Never, ever pay an annual fee. In two decades, I never have -- after all, why pay for what you can get for free, right?

Then about a month ago, I got an offer that made me rethink the advice I'd been following all these years.

The Pop-Up I Couldn't Ignore

I logged on to my American Express (AXP) account to pay my bill and as I clicked to sign out, a little box popped up with an upgrade offer. I automatically started to close it when one phrase caught my eye: "6% cash back on groceries."

I stopped to read the offer more carefully. With two seemingly always hungry kids, I spend a lot on groceries -- at least $500 a month. Then a closer look showed that this upgrade also offered 3% back on gas, another big expense for me.

Of course, there was a catch: If I accepted the offer to switch to the Blue Cash Preferred card, my annual fee would soar from $0 to $75.

Running Numbers and Breaking Rules

Instead of closing the window and ignoring the upgrade pitch, I did some quick calculations.

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What I found suggested that this offer might be an exception to the rule. My average spending of $500 a month on groceries and $250 a month on gas would mean at least $450 a year in cash rewards. Since I don't carry a balance, there are no interest charges to factor in, so that's $375 after paying the annual fee. Plus, the card also offers 3% back at department stores and 1% back on everything else. (I didn't factor in any cash back from those categories since they are more variable.)

It was a no-brainer. In my first month with the new card, I've already earned back a third of the fee (turns out Amazon (AMZN), my go-to for great deals, counts as a department store -- bonus!).

How to Play Your Rewards Card Right

While the math makes sense for me, it won't for everyone. Before you scramble to upgrade your card or dismiss a pitch outright, consider the following:

  • Most cards that offer hefty rewards come with an equally sizeable interest rate. So if you carry a balance, the finance charges will likely outweigh your savings. Skip the rewards and look for a card with the lowest interest rate possible.
  • There are many great no-fee rewards cards out there. The main difference I've noticed is that, whether you're talking miles or points or cash, rewards on no-fee cards are generally capped, while fee cards often have unlimited reward potential. So if you're not a big spender, a no-fee card like the Chase Freedom Visa may be your best bet.
  • Fee or no-fee, make sure you maximize your rewards by matching the card to your spending habits. There's a card for everyone, from BMW drivers to frequent fliers to Costco (COST) devotees. Check out a site like indexcreditcards.com to find current offers that fit your lifestyle.
  • No matter what card you choose, read the fine print so you know how the rewards are calculated. Is there a quarterly or annual limit on rewards? Are certain types of purchases excluded? For example, my 6% cash back on groceries doesn't include warehouse store purchases.

Motley Fool contributor Robyn Gearey does not own stock in any company mentioned here. The Motley Fool owns shares of JPMorgan Chase and Costco. Motley Fool newsletter services have recommended buying shares of Costco.

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