This is a guest post by Mr Credit Card from www.askmrcreditcard.com. Mr Credit Card reviews credit cards on his site. He also has a blog and you can subscribe to his blog here. Mr Credit Card will post a 2 part series on how to choose a credit card with rewards to save money on your spending.

Hi everyone! Firstly, I would like to thank Adam for the opportunity to guest post on his blog. Friends of mine inevitably ask me what credit card they should get when they find out that I actually run a credit card review site. This is a tough question to answer without first finding out about someone’s spending patterns. But the thing that always makes me shake my head is that fact that folks who pay in full every month carry a “vanilla” Visa or MasterCard. Worse of all, some even pay an annual fee to do so. If you pay your balance in full (or carry only a small balance occasionally), then you should be making money from credit cards by a getting a reward card, instead of letting credit card companies make money from you. It should be a two way street.

But how does one go about doing it? First, you have to be aware that there are two types of rewards. There are cash back credit cards that will pay you a certain percentage of cash rebates for every dollar that you spend on the card. Then there are rewards credit cards. These cards allow you to earn points or miles for every dollar that you spend on the card. You can then redeem your points for things like airline tickets, merchandise, gift cards etc.

Cash Back or Rewards?

The first decision you have to make is whether to choose a cash back card or a reward card. For this, the decision really comes down to preference. What sort of rewards do you prefer? Many travelers who fly frequently prefer to get an airline credit card with their favorite airline. Many folks who do not travel and do not want the hassle of redeeming points prefer to earn cash rebates instead.

How Do You Choose a Cash Back Credit Card?

For the rest of this post, I’m going to focus on explaining how I think one should go about choosing a credit card that pays you cash rebates. In part 2 of this post, I’ll focus on how to choose a reward card instead.

The first thing one has to understand is that different credit cards have different cash rebate formulas. And for someone who is researching it for the first time, it could be rather confusing. But here are the few features you have to be aware of:

Vanilla standard 1% formula – The vast majority of rebate cards fall into this category. They will pay you 1% rebate for every dollar that you spend on the card. While this looks like a decent deal and much better than a standard vanilla card, you can get better deals out there.

More than 1% on certain categories – These are the type of cards you should be looking at although there is less of them these days as credit card issuers cut back on the rewards they give. There are cards out there that pay more than 1% on certain categories that you spend. For example, a card like the American Express Costco Card pays 3% on gas, 2% on travel and restaurant spending and 1% on other regular stuff.

Rebates for online shopping – Some cards like Discover Card allows their card holders to earn between 5% to 20% if they use their card to shop at over 100 online retailers through their site.

Tiered Formula – Some cards also have a tiered formula. That means that you need to spend above a certain amount to earn more rebates. As an example, the Amex Blue Cash lets you earn 1% on gas, supermarket and drugstore spending for the first $6,500 of annual spending. Once you pass that threshold, you earn 5%. Having a tiered formula is not necessarily bad. It just means you have to use your card above a certain amount to fully make use of it.

How to Choose the Right Card For You

1. Figure out how much you spend on your credit card – Yes, go through your credit card bills and figure out how much you actually spend on your credit card.

2. Break down your expenses into different categories – The next step is to breakdown your spending into different categories. You should use the following breakdown as a guide:

Gas
Supermarket
Drugstore
Travel
Restaurant and Dining
Movies
Home Improvement
Others

3. Calculate rebates you can earn on different cards – Now comes the tough part. You have to do some research on the different cards available and use a calculator and figure out how much you will save from using each card. Then, once you are done with this exercise, you will know which is the right card for you. To make your life easier, I have actually created a cash back credit card calculator to save you time. All you have to do is to simply key in your monthly expenses in various categories and the calculator will show you the top 3 cards that will earn you the most rebates.

OK – that’s it for this post. In part 2, I will write about the different types of rewards that are available in reward credit cards, whether you should choose a frequent flier card or a regular reward card and other things to look out for. Remember, you should extract as much benefit as you can from credit cards and not the other way round.