Hey guys!
Today, I want to talk about credit card hacking.
You’ve probably heard stories of people who are so good at credit card points that they fund vacations with only credit card points. This can be intimidating for a lot of people, including myself, because it’s a ton of work to search for the best deals to optimize your points and to stay on top of all of the new and best cards.
I don’t want you to get overwhelmed by these stories and not take advantage of the good things you can do with credit cards. Even if you can’t get an entire vacation paid for, there are deals out there that are absolutely worth doing. You don’t need to be perfect, even being good will be so helpful. So what gets you the best value for your time while looking to take advantage of credit cards?
The best way to take advantage of credit cards is by taking advantage of sign-up bonuses. Many cards offer introductory offers that give you points or cash back if you spend x dollars within y months of signing up. From the credit card company’s perspective, the idea is to get you to spend money with the card in the hope that you’ll carry a credit card balance and pay interest payments to the credit card company.
However, this is where you can be smart and take advantage. If you’re planning on spending money anyway, you can use these signup bonuses as a way to get money back on your purchase. This is especially true for large purchases. Got a large purchase coming up that you need anyway? Take a look at getting a new credit card to get some extra money back!
To use a personal example, I have a wedding coming up that my partner and I are planning on spending a decent chunk of money on. One of the purchases we’re going to make for the wedding is alcohol (of course). for a guest list of about 150 folks, we’re likely going to spend about $1,250 on alcohol. Instead of spending this on a credit card with a normal bonus or cash back, we are signing up for a new credit card that has a spending bonus so we can earn some extra money back.
If you’re going to spend money anyway, credit card bonus intro offers are essentially free money.
Throughout the rest of this post, I’m going to be using a credit card that we have that we absolutely love – the Chase Sapphire Preferred. Chase currently has a promotion where if you sign up for the card and spend $4,000 in the first three months of opening the card, you will get 100,000 Chase Ultimate Rewards. This is the equivalent of $1,000 dollars if redeemed for cash, or $1,250 if redeemed for travel through the Chase Ultimate Rewards portal.
Some cards allow you to hit the sign-up bonus multiple times. Chase, for example, lets you hit the signup bonus on their Sapphire Preferred and Sapphire Reserve credit cards every four years. We’re in year three on our card, so we’re using a different one for our wedding. But, I’ll be exited to take advantage of this offer again in two years.
A note about cash-back categories:
If you open a credit card to hit the sign-up bonus during this time both of you should put all spending that you do, including wedding spending on the new card until you hit the bonus no matter if it’s in the bonus category of the card or not.
I wanted to mention this because credit cards are often valued for their percent cash-back on certain categories. While this is a great benefit of using cards, I want to show you how spending on these sign-up bonuses gives you more bang for your buck.
Let’s use this example:
Somebody just opened up a Chase Sapphire Preferred credit card and need to spend $4,000 in the first three months to get the $1,000 bonus. The credit card itself gives double points on restaurants and travel, but single points back on everything else.
This person also has an American Express Blue Cash Preferred card that gives them 6% cash back on all grocery purchases up to $6,000 annually.
The Sapphire Preferred only gives 1% cash back on groceries, and my Amex card gives me 6%. So it would seem I should use my cash back card for groceries, and work towards my sign-up bonus on my Chase card with other purchases right? The math actually doesn’t work out that way. Let’s use an example for educational purposes and say that I need to buy $4,000 worth of groceries. How do the cards compare?
- Chase Sapphire Preferred: $4,000 spend, 1% cash back and $1,000 spending bonus = $1,040
- American Express Cash: $4,000 spend, 6% cash back ($4,000 x .06) = $240
You actually end up earning about four times the cash-back by using your Chase Sapphire Preferred card when you hit the bonus for your introductory offer, even though the Amex card get six times more cash-back on groceries than the Sapphire Preferred. This shows you the power of introductory offers.
This is the biggest tip on lazy credit card hacking. If you have a credit card that you’re working towards a sign up bonus on, always use that card for every purchase until you hit the bonus, then resume using your cards based on the cash back percentage that they get in certain categories. It will pretty much always be worth working towards the sign-up bonus. You can keep signing up for new cards with new bonuses once you hit the bonus on your prior card, and repeat the cycle over and over again.
Voila! A simplified version of credit card hacking.
Pay on time and avoid debt:
One important detail that gets taken for granted when talking about credit cards is debt. In order for these deals to be worth it, you absolutely need to be able to pay the amount owed without carrying a credit card balance (debt). Otherwise, the credit card companies are the ones who end up ahead.
Let’s use an example with the Chase Sapphire Preferred card. You spend $4,000 to get the $1,000 bonus on the card, but you aren’t able to pay off the credit card balance all at once. You can pay about $500 per month towards the credit card debt, but assume that it’ll be worth it to get the $1,000 spending bonus. Let’s use this scenario as an example below and see what the numbers show with the Chase Sapphire Preferred intro bonus. A reminder, this card gets you 100,000 Chase Ultimate Rewards points (equivalent to $1,000 cash, or $1,250 if redeemed for travel) if you spend $4,000 in the first three months of opening the card.
Chase Sapphire Preferred charges a variable APR anywhere from 15.99% – 22.99%. This means that they are charging you monthly for the debt that you owe them 16% to 23% of your outstanding debt balance.
In this example, let’s say you spend the $4,000 in three months and get the $1,000 bonus. Awesome! Except, you can only pay off about $500 of the debt per month. Below, you will see how you actually come out behind in this scenario.
- Month 1: ($1,333 spent – $500 paid) = $833 + APR Charge of 15.99% = ((833 x .16) + 833) = –$966.44 balance
- $1,333 = spending debt
- $133.44 = total interest debt
- Month 2: ($1,333 spent – $500 paid) = ($833 + Prior Month Balance $966.44) = $1,799.44 + APR Charge of 15.99% (($1,799.44 x .16 )+ 1,799.44) = $2,087.35
- $2,666 = total spent
- $421.35 = total interest debt
- Month 3: ($1,334 spent – $500 paid) = ($834 + Prior Month Balance $2,087.35) = $2,920.35 – BONUS, WOO! ($1,000) = $1,920.35 + APR Charge of 15.99% (($1,920.35 x .16 )+ $1,920.35) = $2,227.61
- $4,000 = total spending
- $1,000 = credit card bonus earned!
- $728.61 = total interest debt
- Month 4: ($500 paid out of $2,227.61 prior month balance) = $1,727.61 + APR Charge of 15.99% (($1,727.61 x .16 )+ $1,727.61) = $2,004.03
- $4,000 = total spending
- $1,000 = credit card bonus earned!
- $1,005.03 = total interest debt
- Month 5 ($500 paid out of $2,004.03 prior month balance) = $1,504.03 + APR Charge of 15.99% (($1,504.03 x .16) + $1,504.03 = $1,744.67
- $4,000 = total spending
- $1,000 = credit card bonus earned!
- $1,245.67 = total interest debt
- Month 6 ($500 paid out of $1,744.67 prior month balance) = $1,244.67 + APR Charge of 15.99% (($1,244.67 x .16) + $1,244.67) = $1,443.82
- $4,000 = total spending
- $1,000 = credit card bonus earned!
- $1,444.82 = total interest debt
One note on the math above, you will also earn cash back on your spending in certain categories as you’re using your Sapphire Preferred card, but a 1-2% cash back amount on the card will only be $40-80 and won’t make a big impact on this example.
As you can see, you’re already losing money after only six months. You’ve paid over $1,400 in interest debt payments on your credit card, and still have about the same amount to go. If you play the situation out until the card is paid off, you will spend more than double the amount you earned for the introductory bonus on paying off the credit card interest payments.
This is so important to share. If you feel like you won’t be able to pay off the balance of cards that you open, then it is not worth it for you to take advantage of this strategy. You should be in a financial position to pay off your credit card debt for this to be worth it.
Moral of the story: pay off the balance in full when you take these offers!
Additional Resources:
If you found this article helpful, please consider using my referral link to sign up for a new credit card. I’ve posted my referral link for the Chase Sapphire Preferred, my favorite card. Also please know that you can use this strategy for tons of cards out there, not just this one. There are airline cards, hotel cards, and many other kinds of cards that this strategy can be applied to. Here’s my referral link if you’d like to use it, it will help support the blog!
- Chase Sapphire Preferred: https://www.referyourchasecard.com/6a/9DKNRGHT13
- Annual fee: $95, waived in year 1
- Benefits:
- 100,000 bonus points if you spend $4,000 in first 3 months with this card
- This is the equivalent of $1,000 if redeemed for cash, or $1,250 if redeemed for travel through the Chase Ultimate Rewards portal
- Points can be spent at various travel and hotel partners and redeemed via the Chase Ultimate Rewards portal. Card gives 1.25 bonus for referring Chase Ultimate Rewards Points
- 2% cash back on points for restaurant and hotel purchases, 1% back on everything else
If you are looking for more detailed information on credit card hacking and rewards strategy, I recommend checking out http://www.thepointsguy.com. This site has so much information that can help you out on your credit hard hacking journey.
Thank you guys for reading, make sure you take advantage of free money via credit card hacking whenever you have the opportunity! Until next time.
Roth and Roll Finance 