How to Optimize and Over Optimize Your Credit Cards

Posted on July 06, 2019 · 6 minute read

Credit cards are tricky. If you have a bad history with credit cards, you should probably just skip this article. Optimizing your credit card utilization for travel or cashback rewards can be a great way to get some free money, but the fees and interest you’ll pay when you miss one payment can easily wipe out any past an future rewards.

That’s how the game works, you didn’t think the credit card company was actually paying you with their own cash, did you? The cashback and other rewards you earn are paid by those who are irresponsible with credit. You mess up once and you pay your own rewards and the rewards of dozens of other credit customers.

But for those of us that have pinned down our regular monthly expenses and spend significantly less than we earn, some simple automation can make sure you never miss a payment and get the most out of your credit card rewards.

1. Forget about separate credit cards for dining, gas, travel, etc.

If you already have these separate credit cards, travel a lot for work, and have never missed a payment, keep doing your thing. If not, just forget about these cards. Having many cards like this is a great way to accidentally miss a payment, or overspend, undoing any and all rewards, which is why you got the cards in the first place. Instead, find one or two cards that pay unlimited 1-2% cashback without annual fees. Capital One’s Quicksilver card pays unlimited 1.5% cashback on every purchase.

2. Pay eligible expenses with a credit card

This includes groceries, dining, internet, Netflix, and maybe even utilities. Be careful though, expenses like rent and utilities put the credit card processing fee on the customer, so sometimes paying with a check is the way to go. You should do the math yourself, but paying a 3% fee to pay with a credit card isn’t worth 1% cashback.

3. Set up automatic payments for the complete balance of your credit card

This should be a given, but if you don’t have automatic payments set up on your credit card, stop reading this and go do it now. If you don’t want to set up automatic payments, you probably just shouldn’t be using a credit card at all. Setting up automatic payments ensures 1) that you will never have a late fee for due to late payment and 2) that you will never carry a balance or pay interest on that balance.

4. Set up a separate checking/savings account for cashback deposits

If you are happy with your current bank, contact them to see how you might set up a separate checking or savings account. You will be using this account exclusively for cashback redemption. If your current bank charges monthly fees, this is an instant no-go. The amount of cashback you might redeem in a month is nothing compared to what some big banks charge to manage a checking account, and you won’t be holding a large minimum balance, so you need to find a bank with free checking. Simple is a great online-only bank with free checking and savings.

5. Set up automatic cashback redemption

Connect your newly created cash-back account with your credit card account and enroll in automatic cashback redemption. Every credit card I have offers this feature and some give the option to redeem cashback automatically every month, or whenever your cashback reaches a certain amount, $40 for example.

6. Calculate your monthly average cashback for investment contributions

Get a monthly average of your cash-back using a year’s worth (or as little as 3 months) of cashback redemption. If you earned $20 in April, $25 in May and $20 in June, your monthly average cashback is $21.66. Take this average and multiply it by 0.8, giving you $17.33. To make it simple let’s just say it is $17. This is how much you should contribute automatically every month to an investment account. Using 80% of the average helps us avoid and accidental overdraft and paying fees to the bank in the step below.

7. Invest your cashback

Connect your cashback checking account to your investment platform and set up automated monthly contributions to an index fund account using the amount calculated every month. Then once a year, flush out the remaining balance from your cashback account (that remaining 20% from above, if any) and manually transfer it into your brokerage account and invest it in index funds.

You have now successfully created an automated system to pay of your credit cards monthly and automatically invest your cashback into an index fund! This effectively turns your 1% cashback into a principal compounding at 8% annually! And if you’re only buying things that you actually needed and would have bought without a credit card anyway, you invested $0 so that 8% return is an infinite return on investment! Yeah! Free Money!

cashback rewards are nice, but the best way to save is to simply not spend. Remember not to get caught up in the game. Don’t buy things you don’t need, just for the rewards. Spending $100 on something you don’t need for $1.00 in rewards, isn’t a 1% return, it’s a 99% loss. But if you are a personal finance nerd like me and like setting up systems, this is a fun and quick project that can earn you a little extra. If you manage your credit cards wisely and set up some automated systems, the cashback rewards from your everyday expenses could compound into thousands of dollars over the years.