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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

  • Also think about tax, if any of the spending on the card was refunded from your employer. – Ian Jan 3 '15 at 18:48
  • It is worth noting that sometimes Amazon runs promotional deals, like a $10 credit for paying with cashback. In that case, it is worth it as long as your total purchase amount is such that the additional cashback you'd get is less than the promo discount. – alexw Jul 7 '15 at 21:42
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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.

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    Given many rewards places give a bonus (25% or more) to gift cards purchased with this, that is often a better choice - if it's somewhere you'd go anyway, and if the percent bonus is higher than your rewards % (usually is). – Joe Jan 2 '15 at 20:32
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    I agree with Joe, with my credit card I need more reward points to pay part of the balance off than to get a gift card. I usually get a gift card for grocery shopping. Also something else to consider is whether your credit card has a limit on the number of points you can earn in a year. – Victor Jan 2 '15 at 22:38
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    That depends on the card I guess. None of my cards have this, and I usually take the rewards as balance credit. I actually get extra rewards for buying gift cards... – littleadv Jan 3 '15 at 0:00
  • One exception would be the Citi Double Cash Card, which rewards you 1% when you buy and 1% when you pay. If you use rewards as a balance credit you are reducing the amount you pay and thus the second part of your reward. – Craig W Apr 22 '16 at 13:21
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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.

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    Agree, though I don't entirely disagree with the 'reward' concept. If you budget by assuming no rewards, ie, your rewards balance is above and beyond your normally budgetted costs and income, then occasionally rewarding yourself can be a way to help otherwise stay on budget for some. It doesn't make strictly logical sense, sure, but if it works to keep you on budget... – Joe Jan 2 '15 at 20:34
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    @Joe - I understand. But rewarding yourself by spending seems like a slippery slope to me, and seems unlikely to help you stay on budget. – Joe Strazzere Jan 3 '15 at 13:16
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    For many I agree - but this is one of those things that I think varies by the person. For some rewarding themselves helps them stay on (ie, the "one cupcake a week" diet) and for others it leads to worse things... one of those things where people are different. – Joe Jan 5 '15 at 15:44
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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.

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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.

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We always take our cash back rewards as a balance credit. Here is why:

  1. 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.

  2. 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.

  3. 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.

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    +1 for #2 - Unless that gift card is for a staple, say a gas card or local supermarket. While I'm at odds with the "you always spend more on a card than cash" crowd, I do agree that a gift card has a different psychology. I received a book store gift card, and just ordered a book that I'd otherwise have borrowed from the library. – JoeTaxpayer Jan 3 '15 at 13:19
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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 think this is true. I have CapitalOne, and I had never considered this before. So I looked at my most recent credit card statement. CapOne has a rewards section on the statement, and the rewards they credited me with this month is exactly 1.5% of all my purchases. I had $50 taken off the bill from cash back rewards, but this was not taken off before the new rewards were calculated. – Ben Miller Apr 18 '16 at 9:55
  • Reply to Ben: When you check your next statement, you will see that the $50 you applied to your bill from your accumulated rewards was deducted before the reward credit for that month was calculated, whereas the direct payment from your own funds - not your reward - does not count against the base upon which the reward is calculated. In contrast, if you had the $50 sent to you as a check, the reward would be calculated on the full amount of your charges for goods and services. You can also call and talk to someone at CapOne for confirmation. – Granny InSanDiego Apr 20 '16 at 5:58
  • On the CapOne MyRewards page there is a link to "Check Out FAQs". Here is the key line: " How do I earn rewards? "You will earn 1.5% cash back on net purchases (purchases minus any credits or returns) only. Cash advances, balance transfers, and checks used to access your account are not considered purchases and will not earn rewards." The import word there is NET. When you apply your rewards to the gross amount of your purchases, you get a remainder amount net of the reward amount. This is then used to calculate your next reward. – Granny InSanDiego Apr 20 '16 at 6:22
  • BTW, using your reward to reduce the net amount of your balance does not constitute a payment. And a payment is NOT considered a credit or a refund and therefore has no effect on the NET amount upon which your reward is based. I hope this helps to clarify the situation. Banks do not really want you to know this. They make a lot of extra money this way by paying out lower reward amounts. – Granny InSanDiego Apr 20 '16 at 6:28
  • Your experience does not match mine. I've looked at my last four statements. In each one, I had $50 rewards credit applied to my bill, and in each the rewards earned were calculated based on the purchase total, without subtracting the rewards redeemed. The "net purchases" clause you are talking about is if you return items. You can't collect rewards by purchasing an item and returning it. Any credits you have on your bill from a returned item are subtracted before earned rewards are calculated. I've confirmed all of this using math on my own CapOne statements. – Ben Miller Apr 20 '16 at 13:28
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I don't touch it because by leaving alone to accumulate it adds up to a better FICO score.

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    Why would refusing to redeem rewards help your FICO score? – Ben Miller Jul 2 '15 at 12:47

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