The responsible option won out every time, of course. That’s a good thing, because it was this discipline that set us up for success when we (meaning, my fiance and I) finally discovered how lucrative credit card loyalty/rewards programs could be. Just how lucrative? In the span of time since we’ve began this hobby (exactly one year ago), we’ve managed to secure the following rewards:
- 240,000 Southwest Rapid Rewards points (approximately 16 round-trip flights for a continental US trip)
- The Southwest Companion Pass (allows my fiance to fly for free whenever I fly, effectively doubling our round-trip count)
- 308,000 Chase Ultimate Rewards Points (worth ~$4600 in travel redemptions)
So in a year’s time of spreading out our everyday spending strategically over various credit cards, we’ve been able to pay for a spontaneous Vegas vacation on the strip, flights to visit family, as well as pay for an AMAZING honeymoon for free. I wouldn’t even call ourselves insanely dedicated to this by any means – if you were to really dive deep into this hobby, you would be able to gain far more with efforts beyond the ones we pursued over the past year. My point is, reaping credit card rewards is something you can accomplish in as little as a few hours per month, with a yield of several free vacations per year. And who wouldn’t want a free vacation or two every year?
Onto the details: How do credit card rewards work?
The golden rule of using credit cards responsibly is to never spend more than your budget allows. You should think of a credit card as a method of payment, and not free reign to overspend. If you don’t use a budget, or you frequently go over your budget, you should avoid using a credit card altogether. Check out my article on crafting a beginner budget using the 50/20/30 rule here.
Irresponsible credit use is a very real danger. If you don’t think you have the discipline or even the budgeting skills to use credit responsibly, I’m going to ask you to read no further. The reality about credit card companies is that they profit off of consumers who don’t have the discipline to pay off their credit balance with each monthly statement. They’re literally banking on the fact that you will spend more than you can afford. And they’re not wrong in assuming this will happen – 42% of American credit card holders carry their credit card debt with them month to month, paying a hefty interest fee each time.
A consumer who uses their card for transactions, and pays off the charge before interest hits, accounts for less than 30% of cardholders, with the remainder being inactive accounts. What you should take from this statistic is that far fewer consumers are using credit not only responsibly, but also profitably, and these “profits” (aka free points/miles) are subsidized by the far greater count of consumers who end up paying interest on their credit card debt each and every month.
Let’s say you have $1000 in the bank. You have some bills that amount to $600, which leaves you $200 for groceries and $200 for your own personal spending. (This is a super simplified version of a budget, by the way, and not at all reflective of anyone’s reality!) You know you have to spend that $600 on bills, you know that $200 on groceries will last you through to the rest of the month, and you’re going to treat yourself to a super nice hair appointment for your remaining $200.
If you didn’t use a credit card, you would either pay in cash, check, or debit card for all of those expenses. This is the simplest form of financial accounting – a cash in/cash out scenario. Everything you paid for was paid for with actual dollars in the bank.
If you used a credit card instead, you would put most if not all of those purchases on your preferred card – and then immediately pay off that card with the dollars you have in the bank. It’s still essentially a cash-in/cash-out situation, you just have this extra step in the middle whereby you spend on a credit card, and then pay it off. In this scenario, you’re still spending $1000 as if it were cash – the negative balance on the credit card is “paid for” by the positive, exact amount currently in the bank.
So why would you use a credit card to add this middle step, if you’re treating your spending limit like cash? This is where credit card rewards come in. Credit card rewards vary – there are dozens and dozens of different cards, each with their own rewards system and sign-up bonuses. As a quick and dirty example, a simple 2% cash back card used in the above scenario would award the user $20 for using the card, earned on the $1000 in expenses charged to it.
Compare this to simply using your debit card – i.e. zero rewards. If you know you’re going to spend $1000 on bills and essentials anyway, wouldn’t it be better to net a free twenty bucks from it? This is the basic principle behind credit card rewards.
With a little bit of research and some organization (and most importantly of all, a budget!), you can easily pay for your next family vacation at no out-of-pocket cost. Check out my post that goes into more detail on exactly what steps I took to book our Disney honeymoon for free using this method.
If you can’t wait that long and want to get started immediately, here are my current favorite card offers out there that can help you get started earning free vacations:
- Southwest Premier Rapid Rewards (50,000 Rapid Rewards points at the time of this post)
- Southwest Plus Rapid Rewards (50,000 Rapid Rewards points at the time of this post)
- Chase Sapphire Reserve (50,000 bonus points as of the time of this post)
- Chase Sapphire Preferred (50,000 bonus points as of the time of this post)