4 ways to maximize cash back rewards cards

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When you spend $1,000 on a cash back card with a 1 per cent cash back rate, you could earn $10. Qualify for a card with 5 per cent cash back, and your $1,000 monthly spending (easily met, if you use the card for all your daily purchases) becomes $50 extra in your pocket - now that's getting the most out of your plastic. 

Cash back reward cards are a fantastic idea, and they can be quite profitable for the user. They were created by credit card companies with the intention of luring customers with good credit ratings and cleverly encouraging them to spend more.

If you always pay off your balance each month and are willing to do some simple calculations, you could easily turn a good cash back benefit into a great one. Here are some tips to help you maximize how much you get back just by charging your regular spending:

1. Make sure you spend only what you can afford. 
If you can't pay off your credit card bill each month, the interest will reduce the likelihood of turning a profit from a cash back credit card.

"It's easy to get caught up on the rewards and forget about the interest," Seun Adeyemi, senior financial planner at SA Capital, said in an emailed response to questions.

There's no justification for earning 1 or 2 per cent cash back on a card that has a high balance and a high interest rate - any cash back you're earning is nowhere near how much you're putting toward interest.

2. Record the amount you spend each month. 
This means summing up what you pay for groceries, fuel, clothes and any other regular purchases you make. This is helpful in two ways.

First, you can figure out which card will earn you the most based on your regular spending. If, say, you spend the most in gas and groceries each month, while spending less at clothing stores, a card such as the Scotia Momentum Visa Infinite might be your best option, since it earns the most at grocery stores and gas stations.

"Many credit cards categorize your spending for you, making it easier than ever to track how much you're spending in a certain category," said Adeyemi. "There are smartphone apps like Mint that can help you as well."

Second, if you discover that most of your favourite haunts accept Visa, but not American Express, you can eliminate AmEx cards from your list of prospects when choosing which card to apply for.

3. Do the math. 
Once you've narrowed it down to the cards that are honoured where you shop, figure out which card offers the highest percentage of cash back, the lowest annual fee and the lowest interest rate. You should be aware going in that you might not get the trifecta, but that's OK. If you never carry a balance, the interest rate doesn't matter.

If you calculate that you'll earn more in cash back than what you pay in an annual fee, then you may be able to justify the price. For instance, say you spend about $24,000 a year on your credit card (about $2,000 per month). If you earn even 1 per cent cash back, that's $240 earned in that year. If your annual fee is $150, you've more than covered that cost.

Don't be intimidated by the thought of spending thousands on credit each month. You may find that by simply charging recurring expenses, such as home insurance and gym memberships, you can reap the cash back.

"If you're spending $100 a month on home insurance, instead of paying by direct deposit, you may be able to pay by credit card," said Hiscock. "It's convenient and you'll earn cash back rewards."

As long as the items you charge are already accounted for in your budget, there's no reason why you shouldn't be able to put even your costliest expenses on credit - as long as you can pay off your bill every month.

4. Beware changes, maximums and caveats.
There are a few things to watch out for with cash back rewards.

For instance, the percentage of cash back may be one percentage for the first few thousand dollars you spend, or for the first few months you own the card, and may increase or decrease after that. For example, you may get 5 per cent cash back for the first six months you own the card, and then it could decrease to 1 or 2 per cent cash back.

It's also fairly common today for cash back credit cards to offer higher reward accruals on select spending categories or to cap bonus cash back in a spending category at some dollar amount.

"Many credit cards offer higher cash back on gas and groceries," Brenda Hiscock, certified financial planner at Objective Financial Partners, said in an emailed response to questions. However, there may be a way to customize your categories.

"The Tangerine Money-Back Credit Card offers even more flexibility, letting you personally select the categories with the higher rewards based on your personal spending," Hiscock says.

Also, pay attention to how your rewards are paid out. Some credit cards pay your cash back in the form of a cheque when you reach a certain dollar threshold. With others, such as the Tangerine Money-Back Credit Card, rewards are paid monthly and can be applied toward your outstanding balance or redeemed into your savings account. Still other cards require you to apply your cash back to a purchase when you reach a certain rewards level.

Finally, some rewards will expire if they are not used in a certain period of time, so read the fine print of your credit card agreement. And don't hesitate to cash out your rewards. It's no use to accrue a ton of rewards and never use them - not only will you be in trouble if an expiry date hits, but you also don't want to let them gather dust when they could be funding a treat or helping with bills.

See related: How many credit cards do you need?, Want to boost rewards? There's an app for that, Smart credit card tips for every season

Updated May 11, 2017

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