So lately I’ve been thinking about how to stretch my income a bit, especially since I now should have a reasonably stable income for the next few years. After doing a bit of digging, I have discovered a relatively surprising area where I have been wasting a few dollars a month: in the past, I have used cash or checking/debit for every transaction.

The truth is that by charging all my transactions to a rewards credit card and then paying off the balance every month, I can make a few hundred dollars per year — and the only difference is that I am not using cash/checking for the transaction. Obviously, this only works for those who do not already have credit card debt or would carry a balance, but if you’re one of those who could pay your bill in full every month, this is a good idea to stretch a few more cents out of each dollar.

I did some research to find the best rewards options; there are thousands of different rewards cards and it is difficult to pick which are best. I will list several links below where many options are discussed by experts. That said, what I discovered for my situation is as follows:

1) There is no reason to pay an annual fee for a rewards card unless you’re a really big spender and/or traveler (at which point one might consider a more specific card that caters to one’s needs). By the time the annual fee is paid, there is usually a better card to be found for free. None of the cards I discuss below has an annual fee.

2) If you spend more than about 10k per year that you could charge, the best credit card is probably the American Express Blue Cash card. This card gives 1% back on every gas, grocery, and drugstore purchase and .5% back on other purchases on every dollar spent until you’ve charged $6500 for the year on the card. Then those percentages jump to 5% and 1.5%, respectively. On a budget of about $2000 per month that reflects typical spending patterns, this card ends up paying around 2.1 cents back for every dollar spent. That’s about $480 per year, which is quite a bit of money.

3) For lower spenders (like myself), the best primary card is probably the Chase Freedom card, which gives 1% back on every purchase and 3% back on up to $600 per month on any three of sixteen categories (including gas, grocery, fast food, cable, etc.), calculated automatically every month. Also, if you wait to redeem your cash back until you have $200 in your account, you get an additional $50 bonus, effectively increasing your percentages to 3.75 and 1.25%. On a typical budget of about $1000 per month, this card ends up paying back around $285 per year—not bad at all! To put it in perspective, since groceries are going to be in my top 3 every month, I will get back $1.50 for every $50 I spend at the grocery store simply by charging it to this card and paying it off at the end of the month.

4) Combinations of various cards can actually pay out the most. For a high spender, a combination of the Blue Cash card and the Chase Freedom card can actually do even better than one or the other. For example, one could use the Blue Cash card for every purchase except those purchases in the 3% range on the Chase card (the 3% categories other than gas, grocery, or drug, which should be put on the AMEX)—getting the 3% cash back on those while still getting the higher overall rewards from the Blue Cash card (see the link below for more details on this). Since my spending level is too low to reap the full benefits of the Blue Cash card, I have combined my Chase Freedom card with a Discover Open Road card, which gives 5% cash back on the first $100 of gas/auto purchases each month. I use that card for gas and the Chase card for basically everything else, effectively letting my Chase card have an extra 3% category by using the Discover for gas.

5) Students should also consider getting an mtvU credit card from Citi (I hate that it’s sponsored by MTV, but the card has its perks). There are reward bonuses for making on-time payments, good grades (essentially up to a $20 bonus for getting a 4.0), and not exceeding one’s credit limit. The real benefit of this card is its 5% payback on all restaurant purchases, which is fantastic for students who tend to eat out a lot. The downside is that this is not a true cash-back card; it is a “points” card in which the points must be redeemed as gift cards, etc.

6) Capital One cards should generally be avoided—Capital One does not fully report spending limits to the credit bureaus, which lowers credit scores and can cost quite a bit if you apply for financing on a house or car. The true per-dollar percentage on their paybacks are also lower than the AMEX Blue Cash or Chase Freedom cards as well.

As with any credit card, rewards cards should be used with caution—they should be treated like a debit card. Only spend what you already have; these cards have higher APRs, so if you carry a balance, it can hurt you pretty badly. The other danger is in spending more simply to get more cash back—it is an easy mental pitfall, but it should always be remembered that the rebates offered by these cards only helps if you’re using them as you would a debit card. If you’re spending more, you’re not benefiting yourself.

There are of course numerous skymiles, travel, or hotel rewards cards as well; most of these, however, have an annual fee and don’t end up paying out any more than the Blue Cash or the Chase Freedom cards, which is why I prefer the cash back cards, which offer the most flexibility in how to spend your rewards. (I should also mention that even those who have an AMEX card that charges an annual fee should get the Blue Cash card as well—simply adding it as a second card will lower your annual fee by $55.)

One last trick is to buy gift cards for yourself at gas stations or grocery stores (you can get cards for Best Buy, eBay, etc. at a Kroger or Publix) before making a purchase somewhere else. By doing this, you can get your top category cash back even on purchases that wouldn’t otherwise fit that criteria.

I’ve included a healthy number of links on this topic below for those who want more information:

http://www.freemoneyfinance.com/2007/09/how-you-can-ear.html

http://articles.moneycentral.msn.com/Banking/CreditCardSmarts/HowToScoreWithRewardsCards.aspx

http://articles.moneycentral.msn.com/Banking/CreditCardSmarts/WhatsInTheExpertsWallets.aspx

http://www.askmrcreditcard.com/thebestcreditcards.html

http://cashbackideas.com/amex-blue-cash-vs-chase-freedom-which-one-is-best-65.htm

http://www.cashbackideas.com/bestcreditcard/