What Are The Worst Ways To Redeem Your Credit Card Rewards?
September 05, 2012There’s certainly no shortage of websites that gloat about credit card rewards (admittedly, mine is one of them) so it’s safe to assume that you’ve already heard plenty about the advantages of cash back, airline miles, and the like. But what about the disadvantages? Even the best reward programs have hidden pitfalls. Depending on how you redeem them, you may be taken for a ride. Here are the worst choices you can make.
1. Merchandise
Regardless of the issuer, a universal rule in the credit card world is that merchandise is almost always a bad deal. For example with the Citi ThankYou Points program, I was looking at a Piel portfolio bag which cost 36,900 points. A quick search on Google turned up the exact same bag for $186.40. If you do the math, that means Citi is only giving customers a half-cent value per point when redeemed for the bag. But this isn’t to pick on Citi because the conversion ratio is also disappointing on American Express, Discover, Chase, and most other issuers.
Conclusion? Regardless of whether your credit card offers cash back or points, there’s a good chance they have an option for merchandise redemption. My advice would be to avoid that option like the plague.
2. Concerts, entertainment, and unusual “experiences”
Have you seen that commercial where they show a couple doing extreme rock climbing thanks to their credit card points? Well, they may be even more thankful if they had redeemed their points for something else because typically the entertainment and exotic experiences are not the best ways to use your rewards either.
Take concerts as an example. Some major banks have partnered with Ticketmaster, Live Nation, StubHub, and others to offer them as a redemption option. With the American Express Membership Rewards Program, you typically only get a half-cent per point if you go with Ticketmaster and Telecharge. Alternately, you can choose gift cards from popular retailers and restaurants to get a full one cent value per point. The choice is a no-brainer.
3. Last minute flights
Everyone knows you’re going to get ripped off when you buy a flight last minute. Well guess what? The same thing can happen when you redeem your miles at the last minute for a flight.
The non-branded travel cards (such as Discover Miles and the basic version of Chase Sapphire) are not affiliated with any specific airline. As a result, when you cash out your miles, the number needed will correlate directly with whatever the market price will be at that time. This is because each “mile” is worth exactly $0.01 during redemption. So if the current cash price for a given flight is $311, then you will need 31,100 miles. But if you wait ‘til the last minute when the flight costs $854, you will need 85,400 “miles” to get it.
What’s the lesson here? These credit cards which offer generic “miles” are nice because of their flexibility, but they’re really no different than spending cash. So plan your reward bookings in advance, just as you would if you were paying cash.
And what are the best ways?
There’s no one-size-fits-all answer to this question. It largely depends on the type of card you have. With that disclaimer said, here are the options which will usually give you the most bang for your buck:
1. Frequent Flyer Miles
By these, I’m not talking about the generic “miles” discussed above but rather the true frequent flyer miles which are affiliated with a given airline. The reason these are the best is because if you redeem them strategically, it’s possible to get as much as 2 or 3 cents value per mile. Even if you only earned 1 mile/dollar on your spending, that’s the equivalent of getting 2-3% rewards!
However, not all frequent flyer programs are created equal. With Virgin America’s “Elevate” for example, the value is almost always 2 cents per mile. However the Delta SkyMiles are often referred to as “SkyPesos” because their value can sometimes be a lot closer to one penny rather than two.
This is why I recommend a credit card that will allow you to transfer points directly to multiple frequent flyer programs. That way, when you book a reward flight, you can choose whatever airline at that moment is offering the best value per point. The Chase Sapphire Preferred ($95 annual fee) and AmEx charge cards (fee varies by tier) will allow you to do this with several airlines. However, the best American Express card for flights is actually a hotel card; believe it or not. The Starwood Preferred Guest card has the largest number of airline partners which offer full conversion value (1 Starpoint = 1 miles on nearly 30 airline programs).
2. Partner Gift Cards
I actually hate gift cards…I think they’re the most unthoughtful gift in existence and see no reason why anyone should exchange $1 in cash (that can be spent anywhere) for $1 on a gift card (which can only be spent at a single retailer).
But there is a time when I do like gift cards…when they give me a higher value than what I’m paying to get them. With some credit card programs, you can actually increase the value of your cash back by redeeming it for partner gift cards.
Discover has the best system for this. On all of their partner gift cards (nearly 150 of them) they give you above face value. Actually just this week, I cashed out $45 on my Discover More to get a $50 Chipotle gift card. That’s an 11% boost in value – and coincidentally – it will also probably result in an 11% expansion of my waistline after I get done using it.
3. Cash Back
If you have a cash back card and don’t care for a gift card, then the smartest option will probably be to stick with cash. It’s harder for credit card companies to play games with this one because they can’t use sneaky a conversion ratio to change the value of your cash. We all know a dollar is a dollar.
On the other hand, if you have a points card that offers cash back as an option, be careful because the conversion may be unfavorable. For example with Citi ThankYou Points, there are a plethora of gift cards that give you a full 1 cent per point. On the other hand if you choose cash back or statement credits, the value diminishes to barely 2/3 of a cent.
The worst one to watch out for is Bank of America WorldPoints. Not only will you find this program on BofA credit cards but also a plethora of other financial institutions whom they manage thru their subsidiary, FIA Card Services. With WorldPoints, in order to get a full 1 cent per point, you have to redeem an outrageous $250 worth. Go below that amount and the point value starts dropping dramatically.