I have a credit card with cash back rewards. I can use these rewards to go shopping on Amazon, for example, to buy gift cards, to pay off the balance, and possibly some other options that I may have missed.
My instinct is to simply put the cash back towards the balance. However, are there any other benefits that may be worthwhile to obtain instead?
Note: I pay my balance off in full each month. The card is a Discover It
Either get it as cash or as a balance credit. Unless there's a specific reason to do something else, these would be the most beneficial options.
Using the reward balance towards purchases reduces the rewards you'd be getting for these purchases. Since the reward used towards the purchase is not your "money spent", you don't get the reward on that amount. If you use your credit card to pay the full amount and apply your reward balance to the balance on your card - you'll get rewards in full for your purchases.
If you are purchasing something you would have purchased anyway, and if the rewards purchase yields a higher purchase power than would cash, it makes sense to shop using those rewards.
If not, it makes sense to simply put the cash back towards the balance. That's what I do pretty much every time.
Some folks "reward" themselves by using the points for purchases they wouldn't otherwise make. That doesn't make financial sense to me.
Vendors, and credit cards, offer rebate points because they know people have a bad habit of "double counting" rebates. It's much too easy to think both "I'll get some of the money back so I'm not paying full price" when making the first purchase and then also think "since I'm using the points, I'm not paying full price" when making the second purchase. This psychological weakness encourages us to buy/pay more, over time, than we otherwise would, and is VERY hard to resist.
Taking the rebate as cash might help you realize that you can only count it once. Or it might not. Either way, this is the most important trap to avoid.
With Discover, you can get discounted gift cards with your rewards balance, e.g. a $50 for $40 of your rewards balance.
If you would be shopping at any of the stores/restaurants they offer anyways, it is a good deal to use that. Whenever I get my balance above $45 I send myself a $50 Chipotle gift card since we eat there fairly often anyway.
We always take our cash back rewards as a balance credit. Here is why:
It is the most convenient. We pay off the credit card in full each month, and it reduces the size of our monthly bill. If we had a $25 reward and took it as a check, we'd then have to deposit the check and send it right back to the credit card on our next bill. As a balance credit, we just get our bill reduced by $25.
It doesn't encourage frivolous spending. If we took our $25 reward as a gift card, we might view it as free money and blow it on something we would not have purchased otherwise. Because it is a balance credit and not tied to any particular purchase, it doesn't feel like we are getting $25 extra to spend somewhere. Instead, it helps out our budget in the background. We are still getting the $25 benefit, but it doesn't come to us in a readily spendable way. We budget as if it is not there, and when our bill turns out to be less than what we had planned, it helps us fund our saving goals.
It is essentially a quicker way to get the reward. When you take it as a gift card, you are getting the benefit on future spending. When you take it as a balance credit, you are getting the benefit on your past spending.
With Capital One, using your rebated funds to pay your balance reduces the amount of your rebate in the month you apply it to your balance. For example, suppose your bill is $1000 this month and your credit balance is $100.00. For the $1000 in purchases, you should earn a rebate of $15.00 or 1.5% of $1000. BUT if you use your rebate balance of $100 to bring your balance to $900, then CapOne will only award you a rebate of $13.50 this month. You lose $1.50. Not a huge sum, but still. Of course CapOne makes a lot of money on this because they have millions of users who cannot do simple math and who do not bother to read the fine print. The rebate is not dependent on what you pay but on what you spend. It is easy to go online and ask CapOne to send a check, and that is what I always do. I suspect other cards offering rebates do the same thing. Bankers did not get rich by making life simple for their customers but rather by setting little traps like this for the unwary.
I don't touch it because by leaving alone to accumulate it adds up to a better FICO score.
