So you’ve racked up some credit card points and are wondering WTF you should spend them on. Is it best to save them up and spend them all at once on a vacation? Or should you use them up every month to pay off lots of little things? Is the answer the same if you have a card that earns you points vs one that earns you cashback?
These are just a few of the questions you probably ask yourself about your credit card because, well, credit cards are CONFUSING! There are endless options to select from when choosing your credit card and once you’ve finally decided on one, then you have to keep track of spending categories, payment dates, balances, and manage your perks. It’s exhausting.
But it’s also well worth it because the perks can be absolutely amazing! The most well-known perk offered by credit cards is cashback or points and once you’ve figured out the best way to accumulate them, you have to figure out the best way to spend them. Here’s how to do that.
Earning Cash Back vs Points
Before we break down how to spend your credit card rewards, you need to understand the difference between earning points and earning cashback. Although they’re similar, they do have some key differences.
Cash Back Credit Cards
Cashback credit cards give you cashback on your purchases. It works like this. Let’s say your credit card offers 1% cashback. When you use your credit card to buy something, you pay full price for the item and after that, your credit card company pays you cashback on 1% of your purchase’s value. This essentially gives you a 1% refund on your purchases.
The great thing about cashback is that its value is in dollars, so 1% cashback means you earn $.01 back for every dollar you spend. Since you’re earning cash at cash value, you spend it the same way you would spend the money in your checking account.
Points Credit Cards
Points accumulate similarly to cashback where you receive a certain portion of your purchase amount back in the form of points. This is usually stated differently to you than cashback is, though. Your credit card will say something like you’ll get 2 points for every dollar you spend.
The major difference between earning points vs cashback is that the value of your points will vary based on how you spend them. For example, travel cards often offer you more value for your points when you use them to book flights or hotels than when you use them in other categories. In this case, the value of your points may be $.01 each if you use them to book a flight, but only work $.005 each if you use them to shop for a new couch online. To get the most bang for your buck, you have to spend your points in the categories that value them the highest.
When to Redeem Your Credit Card Rewards
The Best Time to Redeem Your Credit Card Rewards… Technically
The question you’ve been waiting for. Is it better to redeem your points on small purchases consistently or save them up and spend them in bulk?
Technically, it’s better to redeem your points or cashback regularly, thanks to inflation.
Inflation eats away at the value of your credit card rewards the same way it eats away at your cash and savings. If you’re getting cash back from your credit card, your cashback is being devalued by inflation the same way the cash in your savings is. If you’re getting points for your purchases and prices are rising due to inflation, you’ll need more and more points to cover those purchases. Either way, inflation is eating away at your credit card rewards.
To get the most out of them, spend them asap. Use them to cover purchases every month and lower your bill.
Using Your Credit Card Rewards for Big Purchases
While technically it’s better to redeem your credit card points as soon as possible, it’s also really not a big deal if you don’t.
Let’s say that you want to take a trip to Europe, so you open a high yield savings account and start saving the several thousand dollars you’ll need for your trip. The entire time you’re saving up for your vacation, inflation will be devaluing the money in your savings account. Whether you’re saving cash in a savings account or saving up your credit card rewards to spend on a large purchase doesn’t matter. The cash in your savings and your credit card rewards are both being affected by inflation.
So don’t waste your time and energy trying to find the best time to spend your credit card rewards. If you prefer to use them monthly to lower your bill, do it! If you like to save them to use for large purchases, do that! The difference is negligible and it’s definitely not worth agonizing over.