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A Credit Card Survival Guide for New Grads

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Building credit while hunting for a job, wrestling student loans and figuring out post-college life might seem like a tall order. But, just like the triumphant hat toss, it’s an important rite of passage for young adults.

“If you run the numbers, a good credit score will get you the best interest rate on loans you need in the future,” says Martin Dasko, founder of Studenomics.com. “As unsexy as it sounds to work on your credit, that credit score one day can save you thousands of dollars on a car loan or mortgage.”

The good news: Even a single credit card (assuming you use it well) can help you cultivate good credit.graduation-caps

“It’s the fastest and easiest way,” Dasko says. “You can put your cellphone bill and your car insurance payment on the card. Pay on time and repeat that every month, every year, the rest of your life.”

Below are three situations you might find yourself in after graduation – and your credit strategy for each scenario.

1. You’re starting from scratch with no credit history

Leaving college without a speck of credit history because you’ve never had a loan or a credit card? Your goal is to get someone, either a lender or someone with good credit, to give you a chance.

If you have a good relationship with your parents and they have good credit, consider asking if they’ll add you as an authorized user on one of their cards, suggests Michael Staten, director for the Take Charge America Institute at the University of Arizona. Although the account owner (whichever parent owns the card) will be fully responsible for charges made, the account and its payment history will show up on your formerly empty credit reports.

“If you have no credit, that gets you established,” Staten says. “All of a sudden you have a line that’s going to get reported.”

Or, ask a family member with good credit to co-sign a card with you. In this case, you and your co-signer will be held equally responsible for charges. Having a co-signer might sway a lender that wouldn’t be comfortable extending credit to you alone – and, as with an authorized-user arrangement, the card account would appear on your reports.

No family with good credit to turn to? Try a secured card, Staten suggests.

“With the secured-card route, you don’t need anybody else,” he says.

With this type of card, you deposit money with the bank to secure your credit line. That lessens the lender’s risk, and the card’s payment history shows up on your credit reports.

Whichever option you choose, it will clear the road ahead, Staten says.

“Once you have a credit account of almost any sort, acquiring accounts is much easier,” he says.

2. You have no job – and piles of student loans

Not having a job after you get your degree is frightening, and card issuers agree: They don’t want to lend you more (via a credit line) than you can pay back. If your income is zero, you can probably guess how much of a credit line they’ll give you.

But unemployed recent grads still might have a need for credit cards.

“They’re still faced with a need for a credit history and a flexible payment tool, which a credit card offers,” Staten says.

Staten recommends recent grads with no (or low) income pick one of the three approaches above (authorized-user arrangement, co-signed card or secured card) to bridge the gap until they land a job.

If potential issuers will turn you away for having no job, will they run for the hills once they pull your credit and see your student loan balances? Not necessarily, Staten says.

“Some of it will depend on the issuer’s risk appetite, and they vary,” Staten says. “But the big issuers recognize that, for that age group, student loans are part of the game.”

In fact, just having student loans on your credit reports means you’ve cleared the first hurdle of approval (having a credit history). If you’ve made on-time payments on those student loans, all the better.

“You’ve got that track record and that’s all positive,” Staten says. “It might as well be an auto loan with a positive payment history.”

The issuer might still give you a low limit – but that won’t prevent you from climbing the credit ladder says credit expert Linda Ferrari. The key is to keep the amount of credit you’re using below 30 percent of your available credit.

“If you have a $500 limit and you maintain a balance below $150, you will receive the same credit score rating as someone with a $30,000 limit and a $9,000 balance,” Ferrari says.

3. You’ve built some history and feel you deserve some credit

Perhaps you’re beginning post-grad life with an established credit history, thanks to a student credit card, a co-signed card or authorized-user arrangement, or student loans.

In that case, issuers are more likely to give you better terms, assuming there’s a positive payment history associated with those accounts. However, that doesn’t necessarily mean you should apply for a bunch of new cards, Staten says. As you move through life, you’ll find good reasons to acquire more credit naturally: You need a car loan, you switch financial institutions and acquire a new credit card, or you get a good targeted offer from an issuer.

“My general prescription is let it happen over time,” Staten says.

As you collect accounts over time, Ferrari recommends a mix of two to three major credit cards and a car loan as “a perfect mix of credit for a young adult.”

As for your faithful (but low-limit) student card? Don’t automatically dump it. Student cards contribute to your credit scores just as much as non-student cards, Staten says. Plus, your issuer might offer you better terms (such as a higher limit, or an upgrade to one of its mainstream products) to keep your business.

“I would always ask the current creditor first,” Staten says. “Just explain to them what you need, and see what they’ll do.”

An issuer might even upgrade you automatically if you’ve treated your student card well, Dasko says. And if it won’t? There are plenty of options out there for those who have proven they can handle credit well – including cards that offer rewards and benefits like travel insurance and extended warranty coverage.

4. You’re afraid you’ll mess up

Chances are you made some mistakes in college – both of the academic and social variety.  So can you really trust yourself with a piece of plastic that can so easily become an accomplice to bad decisions?

What-was-I-thinking charges aren’t the end of the world, as long as you pay the balance off quickly, Dasko says.

“Stuff happens,” Dasko says. “Do your best and maybe cut back on an expense.  You suck it up, and you pay it off. It’s going to happen. It’s life. We all make mistakes.”

Credit cards that reward you for redeeming

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Redeeming all the rewards you’ve been accumulating on your card can be bittersweet. On one hand, you’re getting a free flight, free hotel stay or cash. On the other, you now have to start from scratch to earn the next reward.

Yet your rewards tank will never be completely empty if you have a card that gives you a redemption bonus. Such cards give you a certain percentage of your points back, just for redeeming them. This essentially increases the value of each point you earn. For example, if you have a card that earns 2 percent back, but gives you 10 percent of your points back every time you cash in your points, you’re essentially earning 2.2 percent back. That’s not exactly a huge boost – but it’s an extra $20 a year (with no extra spending necessary) if you spend $10,000 on the card.

So which cards reward you for redeeming? Here’s a list of some of the most lucrative redemption bonuses in the industry:

Bankamericard cash rewardsBankAmericard Cash Rewards: This card gives you a 10 percent redemption bonus each time you redeem the cash back you’ve earned on the card into a Bank of America Account. The card already gives you 2 percent back on groceries and 3 percent on gas, meaning you’re earning 2.2 percent and 3.3 percent back, respectively, in these categories if you redeem into a Bank of America account. The card has no annual fee. You can read more about it and apply here.

barclaycard-arrivalBarclaycard Arrival: There are two versions of this card (one with an $89 annual fee, and one with no annual fee). Both give you 10 percent of your miles back if you redeem for statement credits against travel expenses. That means, if you redeem 25,000 miles, you get 2,500 miles back (enough for a $25 statement credit for travel). The bonus does not apply if you redeem for other rewards (such as merchandise or gift cards). Learn more about both versions of the card here.

Citi AAdvantage Platinum SelectCiti Platinum Select AAdvantage World MasterCard: You get 10 percent of your redeemed miles back (up to 10,000 per year). So, if you redeem 100,000 AAdvantage miles for an international flight, you get 10,000 miles back (almost enough for a free one-way domestic MileSAAver flight in economy). Strangely enough, the $450 Citi Executive card does not have this perk – just the $95-per-year Platinum Select, which you can read more about here.

Starwood preferred guestStarwood Preferred Rewards Guest card: This bonus is a bit different, as you earn bonus points for transfers instead of redemptions. If you transfer 20,000 Starpoints to one of the card’s partner frequent flier programs, you get a 5,000-point (25 percent) bonus. Because you can do many of these transfers on a 1-to-1 basis (ie, 1 Starpoint gets you 1 frequent flier mile), you won’t lose any value in the transfer. Plus, those 5,000 bonus points are enough for a free night in a Category 2 Starwood property. The card has an annual fee of $65 (waived the first year). Learn more about its benefits here before applying.

IHG Rewards Club cardIHG Rewards Club Card: Each time you redeem, you get 10 percent of your points back, up to 100,000 in a calendar year. IHG points aren’t worth much (often less than 1 cent), but the annual fee on this card is low ($45, waived the first year), and the chain encompasses many budget-friendly properties. Read our review of this card here.

US bank cash+U.S. Bank Cash+ Card: This card is known for its customizable cash-back categories, and it has a pretty generous redemption bonus as well. If you redeem $100 or more at once, you get a $25 (25 percent) bonus. The catch? You can get it only once per year. The card has no annual fee.

As you can see, redemption bonuses can give your rewards earnings a nice little boost, without requiring you to spend extra or jump through too many hoops. The best part? All the cards above have either no annual fee, or one that’s under $100, making them an option for low spenders looking to squeeze value out of low-cost cards.

Card-linked Offer Programs You Can Sign Up For in 2014

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Tired of scrounging for savings with coupons or daily deals? The expanding field of card-linked offers (see table below) promises a solution – the ability to link deals and coupons to the cards in your wallet and get cash back or other rewards automatically.credit card with hundred dollar bills

Card-linked offers aren’t exactly new. Card-linked airline dining programs have been around for years, and issuers have been experimenting with them since 2010. But there’s been a lot of flux in the field. New players keep entering – most recently Coupons.com, which allows consumers to register Visa, MasterCard or American Express cards (with the exception of a few store-specific cards) and load certain coupons onto them.  Both consumers and merchants were requesting such a feature, says Bruce Sattley, senior vice president of product management at Coupons.com.

“The concept is just emerging, and I expect more and more consumers and merchants are going to learn about and use card linked offers,” Sattley says.

Want in on the easy money card-linked offers programs promise? Before you sign up, here’s what to know:

How card-linked offers work

Different programs have their own unique twists, but, basically, card-linked offers work like this: You link deals to your debit or credit card and get cash back credited to your card automatically, simply by using the card at checkout. Other programs (airlines’ dining programs, for example), automatically deposit loyalty points into the rewards account linked to your card. All you need is the card registered with the deals program – no printing out coupons, saving discount codes, loading up your key chain with loyalty cards or fumbling with your phone to show a QR code to the cashier.

Deals vary from a percentage cash back, to a certain dollar amount earned if your purchases ring up to a certain total.

Types of card-linked offers

Card-linked offers can be divided into two categories: programs offered by issuers (which require you to have one of their cards) or open programs that you can sign up for with a variety of different cards.

The issuer-run programs generally function the same way – you search for deals via your bank or card issuer’s website or mobile app and then shop (online or offline) at the participating merchant by the deadline indicated by the deal. This screen shot from Bank of America’s BankAmerideals shows what the interface might look like after a deal has been activated:

card-linked offers

As for open, non-issuer programs, “the possibilities are endless,” says Dom Morea, senior vice president of advanced solutions and innovation for global payment processing company First Data. “Websites, mobile apps, social media sites, location-based services, online and mobile gaming, as well as hotel and airline programs have been very successful with card-linked offer programs.”

Overcoming adoption barriers

If you haven’t signed up for a card-linked program and are ignoring your bank’s deals, you’re not alone. In fact, card-linked programs from Ally, Capital One and Chase have all fallen by the wayside in the past couple years. One possible reason: Banks may not be the first place consumers turn to hunt for deals, says Morea.

“There isn’t always the natural connection in consumers’ minds and behaviors between online banking and shopping deals,” he says.

When it comes to non-issuer programs, there are different reasons consumers might not sign up: While banks already have their customers’ card numbers, other companies offering card-linked offers don’t, meaning consumers have to give their information to yet another entity.

“Keying in your card can simply be too cumbersome or time consuming for some participants,” Morea says.

So what could make card-linked offers more palatable? The system is already pretty seamless, but certain things could make it more so. With some programs, you have to log in, select deals, shop and then wait for a few days for a confirmation that you claimed the deal correctly. Morea predicts real-time notifications of deals on consumers’ mobile devices, faster statement credits and immediate confirmation that the deal was successful (either as a text or a notation on the receipt) could make card-linked offers more attractive.

And then there are the types of deals available. A few card-linked offer programs offer local deals, but many are saturated with deals from national retailers and restaurant chains that may not even be in a consumer’s area. Sattley says more card-linked offers for local businesses are a possibility for Coupons.com.

“And geo-targeting of those offers would be the plan, so consumers only see discounts relevant to their location,” he says.

What about privacy?

The Heartbleed bug and the avalanche of retailer data breaches over the past year might have customers holding their card numbers close.

First Data’s OfferWise program (which is used by a variety of merchants and non-issuing card-linked offer publishers) protects cardholder information so that the merchants and companies using Offerwise can’t see it, Morea says. Coupons.com also doesn’t share account numbers with third parties, and the card information it keeps itself is maintained with PCI compliance (the security standards that govern the payment industry), Sattley says.

None of that makes your information impervious to breaches (just ask any company that’s been hacked). What you can do is limit the card-related information you give out.

“I also mention to people that card-linked offer programs should only ask for their card number – not expiration, billing ZIP or CVV number,” Morea says. ”The card number itself is all that’s needed as a unique identifier for the consumer.  Consumers should be skeptical of any program that asks for additional card-related information.”

Card-linked offer programs you can sign up for (Updated April 2014)

Want to start getting card-linked offers? The chart below shows some of the programs available to consumers. They are divided into the two types mentioned above — those offered by issuers (which generally require you to have a card with that issuer) and those you can join on your own with practically any card.

We’ll be updating this chart with program changes, but be sure to check with the card-linked offers provider you choose for terms and conditions.


Current Card-Linked Offer Programs
ProgramHow it works
Issuer-based programs
BankAmeriDealsEligible Bank of America credit or debit cardIf you have a BofA card, you're automatically signed up. View card-linked offers via online banking. Activate the deals you want, and make a purchase at the designated merchant by the time the deal expires. Cash back is automatically credited to your debit or credit card.
AmEx OffersAmerican Express cardConnect an AmEx card to the program and search for deals, either by logging in to your American Express account, AmEx's iPhone app, or via a variety of social media channels. Activate the deals you want, use your card to pay and get an automatic statement credit.
Fifth Third Bank PrewardsFifth Third Bank credit or debit cardRegister your debit or credit card, choose your deals in online banking, and use them at the correct retailer. You'll get a notification that your Preward has been redeemed, and your card will automatically be credited.
PNC Purchase PaybackEligible PNC check card or credit cardYou're automatically enrolled if you have an eligible card. You'll see available offers when logged into online banking. Activate the offers you want, and shop at the retailer designated by those offers. With this program, instead of cash-back statement credits, you earn points (in addition to any points you're already earning with the card). Points can be redeemed for merchandise, travel, cash and gift cards.
Regions Bank Cashback RewardsRegions Visa CheckCard or Regions Now CardYou're automatically enrolled, as long as you have online or mobile banking. Browse offers in online banking or mobile banking, activate them, shop with your card at the designated retailer and get cash back directly into your checking account.
U.S. Bank FreeMoneeSome U.S. Bank credit or check cardsThis is more of an elusive program. You don't sign up, and U.S. Bank will send you deals based on your shopping patterns. How often? It's completely random. Shop at the store indicated by your FreeMonee gift, and use your card. The amount of the FreeMonee gift will then be credited back to you.
Open programs
MyLinkablesAny U.S.-issued Visa, MasterCard or American Express debit or credit card. Also works with PayPal.Enroll a card (or PayPal account) in the program online. You can then link offers to your card by clicking on them on the website, or, if the offer is in print media, by scanning a QR code or sending a text to the number printed in the ad. Shop with the correct merchant, and your card (or PayPal account) will be automatically credited.
Coupons.comVisa, MasterCard and American Express (with the exception of a few store-specific cards)Register a card with Coupons.com via the website or mobile app. Select coupons to load onto card. Use your registered card at checkout, and the savings will be credited back to your account automatically.
Bing Offers Card-LinkedVisa, MasterCard (website says support for AmEx is coming soon)This program is still in beta – and, at the time of this writing, offered only in Seattle. You can register any Visa or MasterCard debit or credit card, activate offers and shop at the designated merchants.
MojeAny debit or credit cardAvailable only in select cities. Register any credit or debit card (AmEx, Visa, MasterCard, Discover) through the iPhone app. The app will then generate deals near you. You don't have to activate the deals – just shop at the merchants, and the cash back will be credited to your card account.
MOGLAny debit and credit card Available only in some cities. Shop at any partner restaurant and get 10 percent cash back. Choose to get it credited back to your card, or donate it to a local food bank.
vPromosAny debit or credit cardEnroll at the register, by paying with a card, providing the merchant with their mobile phone number and responding "Y" to the text you immediately receive. You then earn points each time that card is used. After enough rewards are earned, you earn a discount, which is automatically deducted from the total at the register when the customer claims that reward.
MarqetaMarqeta reloadable prepaid debit cardLoad funds and deals onto Marqeta card and shop at correct merchant. Earned rewards are held on card to be used with that merchant.

Points + Cash Redemption Options: Calculating the Value

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Maybe it’s because you’re a low spender who doesn’t travel much. Or maybe you’re just spreading your spending among several reward cards. Whatever the reason, the balance in your rewards account is never quite enough to get a free flight, hotel stay or gadget.

If the rewards program affiliated with your card has a “cash + points” option, though (see table below), you still might be able to put your points to good use. This feature, which goes by a variety of names, is most common with hotel rewards cards. For example, check out the options with the Starwood Preferred Guest Cash & Points program:

Starwood Hotels Cash plus points

Whatever the program, a cash + points option will work like this: Instead of waiting until you have enough for a reward, you pay a lower amount of points toward a reward and then cover the rest with cash.

Is it worth it? Do the math

When you mix points and cash, it can be difficult to determine the value you’re getting. Are these programs letting you put your points to good use? Or are they causing you to throw both points AND money out the window?

For merchandise, each rewards point generally has a fixed cash-back value, and you simply pay for the remaining balance with cash. With travel, however, things can be more complicated.

As an example, let’s take a closer look at the Starwood Preferred Cash & Points program – and do the math for a hypothetical Thursday at Aloft Orlando Downtown. This hotel is Starwood Category 3, meaning you’d normally need 7,000 points for a free night. However, because you’re using the Cash & Points feature, you’re spending 3,500 points and $55.

Keep in mind, your numbers will vary, based on your particular rewards program.

Step 1: Calculate the full cost of the hotel room, including taxes. For the Aloft Orlando Downtown, that’s $190 per night.

Step 2: Calculate the value of the points, if you were to redeem for a free night. Divide $190 by 7,000 to get $0.027. In other words, your points are worth 2.7 cents, when redeemed this way.

Step 3: Calculate the amount you’re paying out of pocket. When you book with Cash & Points, room taxes are NOT included, as they are when you book a free night, completely with rewards:

SPG room taxes on cash plus points night

 

Here’s the tax break-down for the room:

SPG room tax breakdown

When you book with Cash & Points, you pay taxes only on the cash portion. So, you’ll be paying 12.5 percent in taxes ($6.60) on the $55 you spent. That’s $61.60 out of pocket.

Step 4: Calculate the value you’re getting for your points when using the Cash & Points feature. Normally, this room would cost you about $190. Instead, it’s costing you $61.60 plus 3,500 points. Subtract the amount you’re paying out of pocket from $190, and you’re left with $128.40. That’s the amount you’re covering with the 3,500 points. Divide $128.40 by 3,500 to get the point value: $0.036. In other words, your points are worth 3.6 cents when you use the Cash & Points feature – nearly 1 cent more than if you were to redeem for a free night.

Step 5: Find out how much value you’re getting for the money you spend out of pocket. The value of your points is only half of the equation. You also need to see how much bang for your buck you’re getting on the $61.60 you’re shelling out. Because the room would normally cost 7,000 points, and you’ve already spent 3,500 points, that $61.60 is covering the other 3,500 points. Essentially, you’re paying $61.60 for 3,500 Starpoints. That means you’re buying them for about 1.8 cents each. If you buy Starpoints through the program’s website, they cost 3.5 cents each. So you can look at Cash & Points as a way to get Starpoints on the cheap.

Conclusion: Using Cash & Points yields a great value for this particular property, both for the points and the money you’re spending.  The value of the points you redeem actually increases, compared to redeeming for a free rewards night. And the amount you spend in cash amounts to getting a discount over buying Starpoints outright.

Be careful, though…

Using points plus cash won’t always be so clear cut. For example, take a look at the Points & Cash option with the IHG Rewards Club, for the Holiday Inn Express & Suites in Berkeley, Calif.:

IHG Points and cash

 

Follow the steps above, and you’ll find that the room costs $192.64, once tax is factored in. Your points are worth 0.64 cents each when you redeem for the free night – but only 0.57 cents when you redeem using IHG’s Points & Cash. Meanwhile, you’re paying $78.64 once tax is factored in to buy 10,000 points. You’re getting a big discount there, at least, as it would normally cost you $135 to buy that many points from IHG. So, while you sacrifice some point value, you’re still essentially getting points at a discount.  If you need to get rid of some points, that might still be worth it to you.

In short: It pays to do the math before parting with your money or points.

Other things to consider

If you’re considering taking advantage of your program’s cash + points option, remember that some properties may charge resort fees (in addition to taxes). You might be able to get these waived (travelers on various discussion forums say they have) — and some hotel chains waive them automatically for rewards stays. Be sure to call the property ahead of time to see what you could be charged.

Another thing to check is whether you’ll earn points on points + cash stays. This varies by program, and some treat points + cash stays like rewards stays – and don’t allow you to earn points.

Chart: Compare points + cash reward programs

Want the ability to book with cash and points? This chart contains a round-up of the reward programs that allow you to do so – and the cards that let you rack up points for them. We’ll be updating it as terms change, but be sure to check your reward program’s terms and conditions for the most up-to-date information.


Reward programs with points + cash options
ProgramAffiliated cardsHow it works
Starwood Preferred Guest (Cash & Points)Starwood Preferred Guest Credit CardBook nights in a standard room or suite for roughly half the number points you'd otherwise need, plus $30 to $675, depending on the hotel category and room type.
IHG Rewards Club (Points & Cash)IHG Rewards Club VisaWorks for both merchandise and hotel stays. For merchandise, shop the online catalog that lets you pay a smaller number of points plus cash for electronics. For hotel stays, you get a 5,000-point discount if you pay $40, and a 10,000-point discount if you pay $70.
Hyatt Gold Passport (Points + Cash)The Hyatt Credit CardBook reward nights using half the points you'd otherwise need, plus between $50 and $300, depending on the hotel category.
Marriott Rewards (Cash + Points)Marriott Rewards Premier Credit CardAvailable for stays of 2 nights or more – pay for part of your stay in points, and then tack on nights paid for with cash. Individual nights must be paid for all in points, or all in cash -- you can't combine points and cash for a single night.
Hilton HHonors (Points & Money)Citi and AmEx Hilton HHonors cardsFor standard rooms at select properties, you can book a rewards night for as few as 2,000 points (reward nights normally start at 5,000 points), plus as little as $30.
Club Carlson Rewards (Points + Cash)Club Carlson VisaBook rooms starting at 5,000 points (reward nights usually start at 9,000 points) to 20,000 points, plus a cash amount determined at the time of reservation.
Delta (Pay with Miles)Delta SkyMiles cardsAvailable only to SkyMiles cardholders. Depending on the original fare price, you can redeem a sliding scale of miles for a discount (10,000 miles for a $100 discount, for example).
Alaska Airlines (Money and Miles)Alaska Airlines VisaUse 10,000 or 20,000 miles to get a 50 percent discount, up to $100 or $200, respectively, off a ticket.
JetBlue (Cash + TrueBlue Points)JetBlue American ExpressOnly for vacations packages. Number of points and amount of cash required revealed at booking.
American Airlines AAdvantage programAAdvantage credit cardsOnly available for card rentals and hotels booked through American Airlines.
Discover (Pay with Cashback Bonus)Discover itYou can use some or all of your cash-back rewards to pay for part of an online purchase with Discover's partner retailers. Pay cash for the rest.
American Express Membership Rewards (Shop with Points)Any card that earns Membership Rewards pointsUse points toward the partial cost of a purchase on Amazon.com or the Membership Rewards online mall, and pay for the remaining balance with your card.

Chase Freedom vs. Discover it: Which is the best 5 percent card?

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If you’re looking for a no-annual-fee card that gives 5 percent cash back on purchases, two of the most popular options are:

  • Chase Freedom
  • Discover it

Both are common features in reward-chasers’ arsenals, and both are very similar in their rewards structures — but which is the best? We’ve got a head-to-head comparison:

Chase Freedomchase-freedom-vs-chase-sapphire

Rewards:

  • 5% in categories that change quarterly (including gas stations, movie theaters, home improvement stores, restaurants and Amazon.com). You have to enroll each quarter to earn 5 percent on category spending.
  • 5% to 15% via “Cash Back Boost,” a feature that gives you bonus cash back if you shop at certain online retailers that partner with Chase
  • 1% on other spending

What you can get: In addition to cash back (via a statement credit or direct deposit ), you can redeem for a lot of things via Chase Ultimate Rewards, including gift cards, merchandise, travel and experiences.

Limitations: Your 5 percent earnings are capped; only $1,500 in category spending each quarter qualifies for 5 percent cash back. Once you reach the limit, you’ll earn 1 percent on all category purchases. Also, you must have at least $20 worth of rewards piled up before you can redeem for cash back.

Discover itDiscover it card

Rewards:

  • 5% cash back in rotating categories (including restaurants, movie theaters, home improvement stores and online shopping) that change every quarter. You have to enroll every quarter.
  • 5% to 20% back on purchases made with partner retailers via Discover’s online shopping portal (ShopDiscover.com)
  • 1% on other spending

What you can get: You can redeem rewards for cash back (via statement credit or direct deposit), gift cards, online purchases and charity donations.

Limitations: You can earn 5 percent on only $1,500 in category spending each quarter (after that, you’ll earn 1 percent). You must also redeem at least $50 at a time if you want cash back.

Which is best?
You probably noticed that these cards are very similar. In fact, they’re almost identical, when it comes to the quarterly rewards structure, the boosts they give for shopping with partner retailers and the limitations on 5 percent earnings. Chase has a slight edge if you’re redeeming for cash back, as it lets you cash out sooner (once you’ve earned $20 in rewards, as opposed to $50 with Discover). However, if you’re keeping the card for the long term (and you easily can because neither carries an annual fee), that might not be very important —  you’ll have plenty of time to reach both those thresholds and not have to worry about cancelling the card before an annual fee kicks in and leaving money on the table.

So, which card should you pick? That’s actually a trick question: Your best rewards tactic is to get both, if you can.

Here’s why:

You’ll cover more ground:  For cards with no annual fee, 5 percent is currently the highest cash-back rate in the rewards card industry. However, the fact that you have to spend in certain categories limits your options. By having two cards, each with different categories, you’re maximizing your chances to earn 5 percent cash back.

For example, if you don’t spend much on movies or restaurants, those categories would probably be duds for you. But if you have a long commute and have another  card in your wallet offering 5 percent on gas stations that same quarter, you’d still be earning 5 percent on something.

You raise the 5 percent ceiling:  With both cards, your 5 percent earnings dry up as soon as you hit the $1,500 mark each quarter. That puts you at a disadvantage when it comes to the big-ticket categories, such as home improvement stores. If you’re doing a major renovations project, you could burn through that in a single trip to The Home Depot or Lowe’s.

Both the Chase Freedom and the Discover it offer a home improvement category (usually they overlap in the spring, which is what has happened this year). If you have both cards, you get to earn 5 percent on up to $3,000: That’s $150.

Want to get even more strategic?
If you don’t mind having an annual-fee card, consider pairing the Chase Freedom card with the Chase Sapphire. By transferring those 5 percent rewards you earned with the Freedom to the Sapphire, you have the opportunity to convert them to points with 10 frequent flier and hotel loyalty programs on a 1-for-1 basis.