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How to Maximize Rewards on Big Purchases

Eva Norlyk Smith Ph.D.

April 16, 2012

QDear Eva,

My credit score is 740. I have two credit cards, each with a $2,000 limit. I&#039m remodeling my basement myself. What I&#039d like to do is get a card with no credit limit and awesome rewards. That way, I could charge all the building supplies on the card (they&#039ll cost more than the combined $4,000 limit I already have) and get a ton of rewards points. I have plenty of money in savings (almost $40,000), so I&#039d be able to pay the balance off in full. I&#039ve been researching the possibilities, and, from what I understand, the kind of card I&#039m looking for is called a charge card (not a credit card).

So, are there any holes in my plan? Do you think my score would qualify me for one of these charge cards? I&#039ve calculated the renovations to cost between $7,000 and $10,000. I could afford it with my savings alone, but I want to make sure my plan of getting a charge card and using it to get some rewards is realistic. — Rob

AHi Rob,

It looks like you might have some misconceptions of what a charge card is. You have it right that you&#039ll be required to pay off the balance by the due date and can&#039t carry over any debt into the next month (as you can with a credit card). And you&#039re right that some charge cards come with pretty tempting rewards.

Unfortunately, there is one hole in your plan: When it comes to charge cards, no pre-set spending limit does not mean there is no spending limit.Ask Eva

If that seems confusing, it&#039s because it is. Classic American Express charge cards like the AmEx Green, Gold or Platinum cards all advertise that there is no “pre-set spending limit.” However, what that really means is that cardholders have a floating, non-stated credit limit. American Express determines the limit based on cardholders&#039 reported annual income and their payment history on the card. In other words, AmEx won&#039t give you a hard and fast credit limit. If you charge more within a month than AmEx is comfortable with, however, the company will contact you and require you to pay off the balance before charging anything else.

Over time, with a history of regular payments, the floating credit limit will automatically increase. So to long-term cardholders who charge the same amount on average each month, it will seem like there is no spending limit. However, anyone charging unusually large purchases will quickly discover that, indeed, there is a limit. And for brand new cardholders, that limit is set fairly low. In fact, if you don&#039t already have a history with American Express, you might well get a credit limit that is higher if you simply apply for a new credit card.

The good news is that you have many other options besides using charge cards that will reap you much greater rewards. The large purchases you have planned will qualify you for some of the more attractive rewards card sign-up bonuses, many of which require cardholders to spend a certain minimum amount. In other words, play your cards right, so to speak, and you can earn rewards points, not just rewards on purchases, but through a handful of bonus sign-up offers as well.

Since you have excellent credit, you have your pick of some of the best credit card offers and could easily apply for two or three new rewards credit cards to increase your total credit limit. Of course, this will lower your credit score slightly over the next 6 to 12 months so if you&#039re planning on applying for a loan, don&#039t pursue this option.

Here is a sampling of rewards cards with generous sign-up bonuses:

  • Chase Sapphire Preferred: Earn 40,000 bonus points after you spend $3,000 in the first three months. Those points are worth $500 toward travel rewards.
  • Capital One Venture card: Earn 10,000 bonus miles when you spend $1,000 in the first three months, a $100 value. Plus, with the Venture card, cardholders earn 2 miles per dollar spent, the equivalent of a 2 percent cash back value on purchases (as long as you redeem rewards earnings for travel purchases).
  • Chase Freedom Visa: Earn $200 in cash back rewards after making $500 in purchases in the first 3 months.

Finally, here are a few notes on how to stretch your credit limit. Before applying for new credit cards, call your existing issuers and ask if you&#039re eligible for a credit limit increase. Most card issuers will regularly increase the credit limit for cardholders with good credit and a history of regular payments on the account.

Increasing the limit on your existing cards could improve your credit score – and that just might help increase the limit you will get on the new credit cards. Just make sure it&#039s an automatic credit limit increase. If the issuer asks to pull your credit report before it can give an answer, decline, as this will show up as a credit inquiry on your report and lower your score.

Once you start making purchases, stretch your credit limit by paying off the balance shortly after you make a purchase. Issuers have limits to how often you can pay your bill each month (in part to avoid this kind of rewards milking). But, in most cases, you can pay off the balance at least twice, essentially doubling the amount you can charge to the card. Just be sure to check with the card&#039s payment policy first.

It will take a little planning and preparation, but if you have the time, the extra rewards earnings will easily make it worthwhile.