Credit cards are a double-edged sword. If you're not careful, then they can destroy your financial life. But if you know how to manage them, they'll treat you right with all sorts of rewards.
Why the generosity? The rewards -- cash, miles, points -- are an incentive to get you to use your cards more. When you plunk down the plastic, lenders get paid in two ways: First, they get a cut of each transaction from the merchant taking your card as payment. Second, they hope you'll take your sweet time paying them back so they can charge you ridiculously high interest rates on your balances.
Don't be blinded by the bonuses: The smart thing to do is to pick a card that fits with how you spend your money (and what you like as a reward), reap the rewards, and -- most importantly -- pay off your balance in full every month.
Given that you need a credit card anyway, having one that will pay you back only makes sense. With a small amount of effort, you can turn purchases you have to make anyway into a nice reward for yourself.
Reward 1: Show Me the Money
Nothing says "thanks for your business" better than cold hard cash. You'll find many cashback cards that give you 1% back on all the purchases you make.
That may not sound like much, but you can turn a pittance into some serious change by navigating the special bonus categories that certain cards offer. For instance, the BlueCash Everyday card from American Express (AXP) pays 1% on all eligible purchases, but it pays 3% on grocery-store bills and 2% on purchases at gas stations and department stores. The credit union PenFed has a card that pays back 5% on gas, and you can find similar deals on branded gas cards.
A few cards make picking the money tree even more challenging, even though the ultimate rewards are worth the extra effort. Both JPMorgan Chase (JPM) and Discover Financial (DFS) have cards with rotating categories that qualify for special 5% cash rewards. The categories generally change every three months, and they have limits on the amount you can spend to qualify for them. Even with those restrictions, you can save a lot as long as you can keep track of what's on sale for any given month.
Finally, look for special offers. Discover recently ran a special offering to pay $250 in bonus cash back for selected cardmembers if they spent $1,500 each month for a five-month period. The catch is that if you fall short for just one month, you miss out on the $250. But if you can go the distance, that $250 amounts to almost 3% more in rewards.
Reward 2: Get Out of Town
The other reward that cardholders love is frequent flyer credit. The right card will give you plenty of points, miles, or whatever you need to get yourself a free trip.
The most common reward is one mile or point per dollar spent. But as with cashback cards, you can find airline miles cards that give you bonuses for certain types of purchases. In addition, some airline cards give you additional savings, such as waived baggage fees.
One thing to watch out for with airline miles cards is that more of them charge an annual fee. So before you sign up, make sure the rewards you get will make up for what you pay to carry the card.
Reward 3: Sign Me Up!
The key to making the most of both cashback and airline miles cards is to get as much as you can upfront. Often, you can get incredible deals just by signing up.
For instance, last year, I was fortunate enough to get credits for two free roundtrips on Southwest Airlines (LUV) just for signing up for its credit card. After I made my first purchase, the card deposited the credits into my frequent flyer account. And although the card charges an annual fee, it was waived for the first year -- with no obligation to renew it after that.
Similarly, some cards pay you big bucks with no strings attached. At creditbonuses.com, you'll find reports from ordinary people like you about sign-up bonus offers that pay as much as $500.
One tip to maximize your cash back is to be patient -- and ask for a better offer. With the Southwest card, I'd gotten numerous offers for a single roundtrip ticket. Only after turning those down did I hit the mother lode with the double-ticket payoff.
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Motley Fool contributor Dan Caplinger has made thousands of dollars from credit card rewards over the years. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Discover Financial and Southwest Airlines.