Money in walletI got my first credit card 20 years ago, along with three strict rules that I've abided by ever since:

  1. Always pay the bill on time. Even one late payment can mar your credit record, and that blemish will linger there for years for all to see, including lenders, potential employers, landlords and insurers.
  2. Never carry a balance. If you can't afford to pay for something with cash, then put it back on the shelf unless you relish paying double-digit interest rates on the amount you borrow.
  3. Never, ever pay an annual fee. In two decades, I never have -- after all, why pay for what you can get for free, right?

Then about a month ago, I got an offer that made me rethink the advice I'd been following all these years.

The Pop-Up I Couldn't Ignore

I logged on to my American Express (AXP) account to pay my bill and as I clicked to sign out, a little box popped up with an upgrade offer. I automatically started to close it when one phrase caught my eye: "6% cash back on groceries."

I stopped to read the offer more carefully. With two seemingly always hungry kids, I spend a lot on groceries -- at least $500 a month. Then a closer look showed that this upgrade also offered 3% back on gas, another big expense for me.

Of course, there was a catch: If I accepted the offer to switch to the Blue Cash Preferred card, my annual fee would soar from $0 to $75.

Running Numbers and Breaking Rules

Instead of closing the window and ignoring the upgrade pitch, I did some quick calculations.

What I found suggested that this offer might be an exception to the rule. My average spending of $500 a month on groceries and $250 a month on gas would mean at least $450 a year in cash rewards. Since I don't carry a balance, there are no interest charges to factor in, so that's $375 after paying the annual fee. Plus, the card also offers 3% back at department stores and 1% back on everything else. (I didn't factor in any cash back from those categories since they are more variable.)

It was a no-brainer. In my first month with the new card, I've already earned back a third of the fee (turns out Amazon (AMZN), my go-to for great deals, counts as a department store -- bonus!).

How to Play Your Rewards Card Right

While the math makes sense for me, it won't for everyone. Before you scramble to upgrade your card or dismiss a pitch outright, consider the following:

  • Most cards that offer hefty rewards come with an equally sizeable interest rate. So if you carry a balance, the finance charges will likely outweigh your savings. Skip the rewards and look for a card with the lowest interest rate possible.
  • There are many great no-fee rewards cards out there. The main difference I've noticed is that, whether you're talking miles or points or cash, rewards on no-fee cards are generally capped, while fee cards often have unlimited reward potential. So if you're not a big spender, a no-fee card like the Chase Freedom Visa may be your best bet.
  • Fee or no-fee, make sure you maximize your rewards by matching the card to your spending habits. There's a card for everyone, from BMW drivers to frequent fliers to Costco (COST) devotees. Check out a site like to find current offers that fit your lifestyle.
  • No matter what card you choose, read the fine print so you know how the rewards are calculated. Is there a quarterly or annual limit on rewards? Are certain types of purchases excluded? For example, my 6% cash back on groceries doesn't include warehouse store purchases.

Motley Fool contributor Robyn Gearey does not own stock in any company mentioned here. The Motley Fool owns shares of JPMorgan Chase and Costco. Motley Fool newsletter services have recommended buying shares of Costco.

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Great post! I found another way to get 6% cash back on gas using a few gift cards from the grocery store.

October 17 2011 at 12:48 PM Report abuse rate up rate down Reply

Like Dave Ramsey says, ask someone who is wealthy how they did it, and they'll never say: "I did it all with credit card points and cash back!" Come on, you're playing with snakes here, and eventually you're going to get bit. All it takes is one payment that arrives a day late or some other little misstep and presto, you're screwed. Has this crisis taught us nothing? Just pay with cash/debit and if you want to make $450, go get a part time job.

August 15 2011 at 9:24 AM Report abuse rate up rate down Reply

Very interesting; thanks for sharing. Unfortunately had to wade through a bunch of spam, some unnecessarily nasty comments and someone who can't do the math. The author stated it was SIX percent on groceries, not 5%, so the savings comes out to $450 a MONTH x 12 months = $5400 saved annually. Very nice, in my book.

August 14 2011 at 10:36 AM Report abuse rate up rate down Reply
Peter Formaini

"If you can't afford to pay for something with cash, then put it back on the shelf

See full article from DailyFinance:"

Um - if this is true, then why have a credit card in the first place? Why not simply have a debit card linked to your checking account?

August 14 2011 at 2:46 AM Report abuse rate up rate down Reply

I really hate people that tell others what to do. Why Robyn sound like a mini Warren Buffet. Wait until an emergency comes up in your life, and you need to carry a balance, God forbid.

August 14 2011 at 1:26 AM Report abuse rate up rate down Reply

I used to be dead set against any sort of annual fee but then I got a a capital one master card which I pay a $39 annual fee on. But so far this year I've already received almost $200 in cash back so there's no question it was the right thing for me to do.

August 13 2011 at 10:26 PM Report abuse rate up rate down Reply

I do not have any credit cards that charge an annual fee. I have Chase Freedom Visa which gives 5% cash back on certain categories each quarter. Now it's gas and hotels. I shop at Costco for most of my cheap food, and they only take American Express, cash, and checks, so I can't use the visa there. Most of the cards that give you 5% back require a high credit score to get the card. Most people don't have high 700's or 800's scores that these credit card companies require. Better to go with a card with no annual fee, and get a 5% cash back card that does not require an annual fee.

August 12 2011 at 10:45 AM Report abuse rate up rate down Reply
Apexi RSX

these people obviously need to go back to school because 5% of 750 a month spent is only 37.50. what a misleading article. this is why America is so stupid to fall for these gimmicks. 5% of 100 is 5 dollars dURRRRRRRRRRRRRRRR

August 11 2011 at 12:29 AM Report abuse rate up rate down Reply
6 replies to Apexi RSX's comment

You can compare our government to a half grown child, it wants everything but dont work

August 10 2011 at 7:10 PM Report abuse +2 rate up rate down Reply

Wow another converted person.

August 10 2011 at 5:49 PM Report abuse rate up rate down Reply