Determining value of rewards redemption
Redeeming points for merchandise has an upside
Dear Cashing In,
My rewards credit card has an online site where I can exchange reward points for merchandise or gift cards. Is buying merchandise with your points a good deal?
When real "money" is more important in your pocket than any amount of miles or points, it just might be. The answer, however, depends on the nature of the rewards credit card you are referring to. Why is this important? Let's say you have a particular airline frequent flier reward credit card. The best "value" for you with this card will always be redemption for airline travel. The same thing is true if you had a hotel rewards card. The best value would always be for redemption at hotels. And, of course, the best value from other types of rewards credit cards will be when you redeem for product or services with the actual sponsor of the rewards card.
Here's the key to understanding this value function: Whenever any rewards program has to "buy" rewards outside their purpose of business, that cost is reflected in a lower value to the cardholder. For example, for most airline rewards credit cards, redeeming for air travel will often bring you value of 1.5 cents to 10 cents per mile being redeemed. However, when redeeming those same miles for an iPod, flat-screen TV or even gift cards, the value is often pegged at only 1 cent per mile and often less.
There are two situations when redeeming reward credit card miles and points for merchandise makes perfect sense, and frankly, I've used my own miles and points for these exact purposes:
1. When your personal financial situation makes it prudent to watch your pennies. Given the current economic uncertainties, I can easily recommend that cardholders use their points for things they might normally reach into their wallets to purchase. This time of the year, graduation gifts come to mind, as well as perhaps gasoline cards, home improvement cards and even the new set of golf clubs you've had your eye on. (In tough times, you don't want to give up hope for your golf game!) I think that these types of utilitarian redemptions can serve a good purpose. After all, while you may not be getting the absolute "best" value for your miles and points, you at least are adding value to your life.
2. When you simply have too many miles and points. Balances for many of the rewards cards have boomed with the never-ending addition of partners to earn reward currency from and the more recent incentives to earn even more with never-ending promotions. So, if you have hundreds of thousands of miles and points, then use those for merchandise. Besides, if you have that many, you're likely able to replace them soon enough anyway.
So your reasons for redemption are when your own personal situation demands it, with an understanding that you'd go crazy if you tried to value average every redemption. Me? I'm all for redeeming my miles for the big screen TV now that baseball season has started!
Meet CreditCards.com's reader Q&A experts
Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com's Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.
- Is it worth it to transfer Hilton hotel points to American Airlines? – If you want to transfer hotel points to an airline to get a free flight, check the transfer ratio first to make sure you're not losing value ...
- Which credit cards should I carry in my wallet? – If you have a stack of credit cards and are trying to decide which ones to keep in your wallet, here are some ways to decide which to keep and which to stash ...
- With Citi Costco card, which gas stations earn 4 percent cash back? – You can earn rewards most places you fill up, with a few exceptions ...