Why credit card rewards are for spending, not hoarding
Old coins, holographic Pokemon cards or 鈥渆xtremely rare鈥� Beanie Babies might grow more valuable over time. But credit card rewards? They鈥檒l almost always lose value.
Loyalty programs are great for earning perks, but they aren鈥檛 the safest place to keep a small fortune. The longer you sit on your stash, saving for some far-off dream vacation, the more you expose yourself to risks like inflation, devaluation and reward forfeiture.
Your issuer giveth and taketh away
If you don鈥檛 touch your stocks for a long time, you鈥檙e like Warren Buffett. But try that with credit card rewards, and your issuer might close your account because of inactivity, causing you to forfeit your rewards.
That鈥檚 what happened to Ahmed Bhuiyan of Seattle, who says he lost $3,730 worth of credit card points when his issuer closed his account due to inactivity last year. He didn鈥檛 notice until he checked his account one day.
鈥淚n the right-hand corner, where you see how many points you have, it said zero,鈥� says Bhuiyan, who was working in Singapore at the time and had stopped using that card to avoid foreign transaction fees. 鈥淚 thought it was a mistake.鈥� Despite spending more than two hours on the phone with customer service, Bhuiyan wasn鈥檛 able to reinstate his points, which he had been saving for his honeymoon.
Bhuiyan isn鈥檛 the only cardholder who has lost rewards like this. It鈥檚 legal for issuers to close accounts for almost any reason without giving advance notice. During the 2008 financial crisis, creditors closed large numbers of accounts to prevent defaults.
Devaluation happens
Loyalty programs seem predictable 鈥� you earn, you redeem, end of story. But in reality, your issuer can change the rules of the game at any time. And it probably will at some point, for reasons such as rising expenses, competition or financial pressure.
When frequent flier programs were first introduced in the U.S. in 1981, they were 鈥渦nbelievably generous by today鈥檚 standards,鈥� writes Jay Sorensen, president of loyalty research firm IdeaWorksCompany, in a聽聽on airline loyalty. 鈥淎merican鈥檚 first program made every first class seat available and didn鈥檛 bother with reward seats in economy.鈥� Now, availability is much more limited.
The cost-cutting continues. This year, for example, American Airlines and Delta increased award prices on certain flights, effectively reducing the value of their airline miles.
Inflation happens
If your credit card offers聽聽or travel statement credit, you don鈥檛 have to worry about airlines increasing their award ticket prices overnight. But your rewards balances will still be affected by rising prices.
Inflation is the reason that your grandparents were able to rent a swanky apartment for $200 a month in the 鈥�60s, but you鈥檒l have to pay way more today. It鈥檚 also why a $100 cash-back sign-up bonus earned in 2013 will get you only about $96.37 worth of stuff today.
The longer you keep your cash-like rewards with your issuer, the more purchasing power you鈥檒l lose 鈥� even if your issuer never changes the terms of its program. Rewards accounts, sadly, don鈥檛 earn interest.
How to manage your rewards instead
鈥淒on鈥檛 hoard your credit card rewards鈥� is easy to say, but harder to do. If your rewards are piling up, here鈥檚 how to deal.
If you have travel rewards, watch for bargains.聽Bhuiyan says his experience made him more careful about keeping his loyalty accounts active, and it changed the way he manages his points. 鈥淚鈥檝e started redeeming them more,鈥� he says. When he sees a good deal, he takes it. You can scope out offers yourself by reading your loyalty program鈥檚 promotional emails, monitoring award prices online and using travel-booking comparison apps.
If you have cash back, invest your rewards.聽Redeeming cash-back rewards is a good first step. But if you really want to grow your money, don鈥檛 spend it right away or sock it in a savings account with piddling interest rates. Invest it. You might be able to offset the cost of inflation by using your rewards to contribute to an IRA account.
If you have cash back or travel statement credits, sign up for auto-redemption.聽Some cards let you automatically redeem your rewards at regular intervals, requiring no effort on your part. If that option isn鈥檛 available, set a reminder for yourself to log in once a month and redeem your rewards. Take the money and run.
Claire Tsosie is a staff writer at NerdWallet, a personal finance website. Email: claire@nerdwallet.com. Twitter:聽.聽This article was written by and was originally published by聽.
