Should you use card rewards to pay down debt?

Rewards can be an asset that can help you knock out debt

Allie Johnson
Personal Finance Writer
Award-winning writer covering consumer and small-business credit cards.

Should you use card rewards to pay down debt?

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Maybe you’ve been saving your boatload of rewards for a big trip you wouldn’t otherwise take because you owe money. But your points or miles might be better spent on a one-way ticket out of debt.

“We hear the term ‘travel hacking’ for people who sign up for lucrative reward bonuses to redeem for free travel,” says Melanie Lockert, a personal finance blogger and author of “Dear Debt: a Story About Breaking Up With Debt.” She adds: “It's not as well-known or as common of a strategy to use rewards for debt payoff.”

There are two big reasons rewards aren’t often touted as a way out of debt:

  • Rewards experts recommend squeezing maximum value out of your miles and points, and the best way to accomplish that is typically to book travel. When you trade in rewards for cash or a statement credit, they’re generally worth less than if you used them to book a plane ticket or hotel room. For example, with Chase, 50,000 points are worth $500 in cash, but $625 in travel when redeemed through the Chase Ultimate Rewards portal or perhaps even more if transferred to the right airline frequent-flyer program.
  • Personal finance experts often warn consumers with debt to steer clear of rewards cards, which generally charge higher interest and carry higher annual fees. Also, the allure of racking up rewards by spending could tempt a cardholder to dig deeper into debt.

However, in the real world, it’s not uncommon for a cardholder to wind up carrying debt and holding rewards at the same time, says Durango, Colorado, personal finance coach Matt Kelly. Maybe you opened a rewards card and slowly fell into the temptation of spending beyond your means. Or, your finances were flush, you opened a few rewards cards, and then a life event cost you more than expected.

That’s what happened to J.R. Duren, a money writer at the personal finance site HighYa.com, who has about 35,000 in Chase Ultimate Rewards points he was planning to use for an anniversary getaway with his wife. However, after charging some nursery furniture for the couple’s new baby at Ikea, he’s now considering trading in the points for $350 to pay down his balance.

“I’m leaning toward converting the points to cash because having a new kid is expensive,” he says. 

Should you cash in your rewards to pay down debt?

If you’re sitting on a pile of rewards and you have credit card debt, it’s probably a good idea to at least seriously consider cashing in the points.

Is free travel a priority or is getting out of debt faster a priority?

Rewards are assets that can help you knock out debt, just like forgotten money sitting in a bank account or an exercise bike you now hang laundry on, Kelly says. “It’s really about deploying your assets in a way that’s most meaningful to you,” he says.

Here are four factors to consider when deciding whether to use your rewards to pay down debt:

1. Where are your points sitting now?

If your points are sitting in a major credit card rewards program, you can probably turn them into cash.

For example, Chase Ultimate Rewards lets you redeem points as a deposit into a checking account or as a statement credit, and Citi ThankYou Rewards allows you to redeem for a check in $50 or $100 increments. You could be out of luck if you’ve transferred your points into an airline frequent-flyer program, or if they got deposited into one automatically as happens with some airline credit cards.

While there are plenty of shady brokers offering money for miles, hawking yours to a stranger on Craigslist or your cousin Phil, violates the terms of frequent-flyer programs. Selling miles could get your account shut down, warns travel consultant Ben Schlappig at One Mile at a Time. However, he points out you can redeem miles for merchandise. And, if you’re determined to become debt free ASAP, you could sell the stuff and put the proceeds toward your debt.

2. How much of a dent will your points put in your debt?

Check to see how much your rewards are worth if redeemed for cash or a statement credit, and compare that number to your total balance. Would the rewards be enough to pay off your debt completely? That’s a huge plus because knocking debt out not only feels good, it could save you hundreds of dollars or more in interest, says Kathy Hauer, a certified financial planner and author of “The 11-Step Do-It-Yourself Comprehensive Financial Plan.” 

If your rewards will pay down only part of your debt, use a credit card debt calculator, plug in your numbers and see how much more quickly you could be out of debt using your rewards and how much money you’ll save in interest.

“Do you have balances on high-interest credit cards?” Duren asks. “In that case, it would probably serve you well to use your rewards points for cash.”

3. What is the value of your rewards if redeemed for cash versus travel?

Remember that certain points or miles get devalued when exchanged for cash.

“Each different type of reward can be thought of as a unique type of currency,” says Jacob Lumby, who has a doctoral degree in financial planning and is co-founder of the sites CashCowCouple.com and TightwadTravelers.com.

In some cases, the difference can be substantial. For example, while Duren could get $350 cash for his Chase Ultimate Rewards points, he could redeem for three nights at a hotel for $480 to $500 value or even more for flights. Paying attention to the redemption value of each currency will allow you to make an informed decision about what to do, Lumby says.

4. Do you have a trip already in the works?

If you’re hoarding points with only a vague notion that you’ll take a dream trip in a year or two, using your points to pay down debt might be a no-brainer.

First, rewards experts advise against stockpiling points without a plan due to the possibility that points can get lost or devalued.

Second, it will cost you money to take that future “free” trip, which might not be the wisest move if you’re still in debt. “You’re going to pay for breakfast, lunch and dinner, and sightseeing throughout the day,” Duren points out.

Do you have balances on high-interest credit cards? In that case, it would probably serve you well to use your rewards points for cash.

However, it’s a different story if you have concrete plans to take a trip for which you’re counting on using your rewards. In that case, you’ll need to crunch numbers to see if you benefit more financially from using the rewards to pay down debt now or saving them for the trip. It doesn’t make sense to redeem for $500 in cash now, then spend $1,000 next month on plane tickets you could have bought with your rewards.

For example, Duren knows he and his wife will go on an anniversary trip in 2018. So he calculated the number of months left until the trip, looked at his monthly spending, and found that he’ll accrue enough rewards to go ahead with the trip using points even if he cashes in his rewards now to pay off the debt from his new baby.

In addition to considering these four factors, look at your goals. Lockert says you should ask yourself: “Is free travel a priority or is getting out of debt faster a priority?” 

Playing the rewards game to beat debt

But what if you don’t have a pile of rewards already built up and are wondering if you should try to rack up some points to get out of debt more quickly?

If you qualify and open a new card with a sign-up bonus, you could earn a chunk of change to pay down your debt. However, some personal finance experts strongly caution against this, especially if your debt is credit card debt rather than, say, student loan debt.

“You should not use the same thing that got you into debt to try to get out of debt,” Lockert says. “It doesn't make sense.”

But the strategy could work for the right person, Hauer says. “You have to know your own personality, and know whether you can trust yourself to get another card,” she says. “It’s a very individual thing.”

Hauer points out you need good credit to qualify for rewards cards with sign-up bonuses, which means that someone with an outsize debt load or a history of managing credit irresponsibly likely wouldn’t qualify for one anyway.

Keep in mind that cards with sign-up bonuses have minimum spending requirements you need to meet to get the bonus. For example, the Chase Sapphire Preferred card offers a 50,000-point bonus, worth $500 cash, when you spend $4,000 on the card in the first three months.

If you decide to open a new rewards card to get a bonus, it’s important to look at your regular spending, calculate how much you can spend each month and make sure you can meet the minimum spending requirement. It’s also crucial to make sure you’re putting only items you’d otherwise buy on the card so you don’t overspend.

Bear in mind that research shows consumers are very susceptible to overspending on credit. Let’s say you have to spend $3,000 to get a $500 bonus, but you overspend by 15 percent because you’re using credit, Kelly says. “You’ve just spend $450 in pursuit of $500,” he says.

On top of that, it’s possible you will end up racking up more debt, Kelly says. He says opening rewards cards when you’re already in debt is not a great idea. “You’re entering into a deal you’re going to lose,” he says.

See related: Redeeming rewards as a statement credit: Many cards allow it, How to redeem your card's cash back reward


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Updated: 08-16-2018