The average American has 3 credit cards in their wallet [1]. So how do you know if you’re using the right one? Most people probably don’t have a clue. Each credit card has its own unique rewards system – whether it’s cashback, airline miles, or points. And with over 1,000 different cards to choose from, who has time to figure out which one is the best? [2]

Sadly, I do.

Before Choosing a Credit Card

For the most part, rewards credit cards operate the same way. They offer a rebate based on the amount spent, which can be redeemed for specific benefits. Certain spending categories can earn you extra rewards, and many of the issuing banks offer sign-up bonuses. These cards can be great tools for stretching your dollar, but only if they are used correctly. So before I started looking for the best all-purpose credit card, I established a couple prerequisites.

First, I set a goal to pay my monthly credit card bills in full. Credit cards have some of the highest interest rates – up to 35%! Unless you’re really in a pinch, it’s absolutely crazy to pay that much.

Carrying a balance will drastically increase the amount you owe, which wipes out any rewards given by the card. It’s best to spend what you can afford and pay it off immediately. This being said, the annual percentage rates (APRs) weren’t considered while searching for the best all-purpose credit card.

Second, I only looked at cards with no annual fees. The amount I charge on credit each year just isn’t enough to justify paying the added cost. Take for example the Citi Double Cash 2% cashback card which has no fees, and compare it to the Alliant Visa Signature 2.5% cashback card that costs $99 annually (after the sign-up bonus period).

I would have to spend at least $4,000 with the Alliant card just to break even. And it doesn’t start outpacing the Citi card until spending more than $20,000. Maybe in the future a high rewards card with an annual fee will make sense, but for now it’s on the sidelines.

The Miles Credit Card

Credit card miles are very lucrative for those that travel regularly. This type of travel card can earn you multiple miles for each dollar spent. But before you get too excited, the miles don’t actually equate to the distance of the trip. Unfortunately it’s just a clever name for the reward system.

Miles are a type of point that can be refunded for flights. Usually the credit card will be partnered with an airline, and those miles can only be used towards that company. It’s a nice incentive for staying loyal and shopping with them regularly.

Limited Reward Options

Airline sponsored credit cards will help you rack up tons of miles, especially when you make purchases through that airline. But they also limit your flexibility because you’re stuck buying from just one company. It’s a double-edged sword.

My wife has the Gold Delta SkyMiles credit card. When we find a Delta flight at a good price and reasonable departure/arrival times, the miles come in handy. However, last month she planned a trip through American Airlines because it was a cheaper deal with a better schedule.

There are over a dozen domestic airlines and even more regional carriers. The odds of finding a better flight through another company are relatively high. These situations make it hard to root for a sponsored travel card.

Varying Mile Value

Not all miles are equal. Think of it in two ways: earn vs. burn [3]. Making purchases with an airline credit card will earn you miles. That part is fairly straightforward. Where it gets tricky is when you cash-in, or burn, those miles.

Say your card gives you 2 miles per dollar spent. You save up 40,000 miles and use them for a flight from Chicago to Orlando. Your friend tells you about their card that earns 1.5 miles per dollar with a different airline. Clearly inferior, right? Well not quite. Your friend plans a similar trip, but it only costs them 30,000 miles.

Credit card companies like to disguise high rewards with diluted value. Miles can even lose spending power when redeemed on weekends vs. weekdays, or business class vs. economy. Therefore both sides of the earn and burn equation have to be considered. Stay vigilant when picking out a travel credit card and do your homework. For me though, the airline travel card is not the best all-purpose credit card.

The Points Credit Card

Points are the other rebate currency offered by credit card companies. Like the airline mile, it is a reward structure that compensates you based on each dollar spent using your card. Points can be spent on a number of perks, even cash. That puts this card somewhere between the airline mile and cashback cards.

Broad Rewards

Points allow you to redeem your rewards in more than one way. This makes them a versatile finance tool. The options will vary between card providers, but this list of redemption categories shows some of the available choices:

• Gift cards
• Merchandise
• Cashback
• Airfare
• Hotels
• Car rentals
• Charitable donations

If you don’t like the idea of being stuck with airline miles or cashback, then the points reward card might be an attractive option. Just be sure to read the fine print before signing up.

Increased Complexity

Tread lightly – points also come with strings attached. Unfortunately, you have to watch out for some of the same pitfalls in points as you do in airline miles (like the point value differing between card providers). Once you have a grasp on that, be sure to review any spending limitations on your rewards.

Cards can have blackout periods where points can only be cashed-in during specific times of the year. Rewards can also expire after 12 or 18 months, which makes saving points difficult for infrequent credit card users.

Even if you jump through all of these hoops, at the end you may come to find out that there are fees associated with point redemption. When the points are difficult to earn and even harder to spend, chances are you won’t gain much from the card. This type of card has its perks, but it’s not the best all-purpose credit card.

The Cashback Credit Card

The last category I looked into was cashback. It’s a simple system because the valuation of the reward is straightforward. Everyone knows the worth of their dollar. Cash can be used towards any expense, so it’s hard to go wrong with this one.

Cash also never expires. Once you redeem the money, it’s yours. You don’t have to worry about saving up points or miles until you can afford that getaway trip. Just stash the money you’ve earned and let it grow.

Saving over Spending

My favorite aspect of this card – that sets it apart from the others – is that it can promote savings. Airline miles might persuade you to go on a trip you normally wouldn’t have planned. And although points can be used for cashback, the other options could tempt you to spend your rewards on a gift card or merchandise.

If you use cashback wisely, all the money earned can be put towards paying off your credit card statement or other monthly bills. You could even deposit the money into a high yield savings account or broad market index fund.

Budget Engineer Tip:  Don’t waste your credit card rewards on a workout bench that you’ll hardly use. Your significant other will remind you regularly.

Maximizing Cashback

To capitalize on how much you can receive with your card, it’s best to look at your spending habits and compare them to the card’s reward categories. Some credit cards have flat rates, like 2% cashback on all purchases. Others will offer 4% on dining or 5% on gas, but 1% on the remaining categories.

I ran through my spending from last year and compared it to these card structures. Assuming unlimited cashback, here is how my rewards would vary:

The only way for me to beat 2% flat-rate cashback would be to pick the highest rewarding cards for every spending category. That means I would need a card for dining, gas, entertainment, grocery, and travel. Realistically I don’t see myself managing 5 or 6 credit cards.

What About The Sign-up Bonus?

I approach most of my financial choices the same way: I’m in it for the long run. My savings, investments, and even credit cards are geared towards the future. I’m young, and time is on my side.

That’s why I usually don’t like credit card bonuses. Not to say that I don’t want extra rewards, but there’s no such thing as a free lunch. As a rule of thumb, credit cards with amazing sign-up bonuses will have mediocre rewards rates. Over time, these cards get outpaced by other high-rate cards.

The Bank of America Travel Rewards credit card earns unlimited 1.5 points for every dollar spent and gives a 25,000 point sign-up bonus (equal to $250). The PayPal Cashback credit card has unlimited 2% cashback on all purchases, but lacks a sign-up bonus. According to Experian data, the average America has an $8,000 credit limit and a 30% credit utilization rate [4]. Based on this level of spending, the PayPal card would start earning more rewards after just 1.75 years.

I’ll admit there are exceptions to every rule, and this one is no different. If you hunt hard enough you can probably find the best sign-up bonuses that have great reward rates. Life is busy though, and most people don’t have time to keep up with the latest deals or juggle multiple credit cards.

Read my final pick for The Best All-Purpose Credit Card at The Budget Engineer