Use Your Rewards Points Wisely

Chances are that you have a credit card that offers some types of rewards points. Many banks and companies have created those as incentives for you to keep using their card, obviously. But how do you make the best deal out of it? First by picking the rewards that fit you the best, but then also looking at the relative value of the rewards they offer.

I have one card that offers points that can be used toward a variety of things. Some are gift certificates to stores, others are merchandise or travel, and at some levels they offered credit toward your account balance. That ended up being a nice little deal. Not just because it was a credit direct back to me, but also that it had a higher value per point. Let me explain.

If you look at the rewards this card offered (and you can looked at your own cards programs) you can calculate what the value of a point generally equals. For example, if it takes 6,000 points to get a $25 gift certificate then a point equals less than half a penny (about $.004). If 10,000 points gets you a $50 certificate then a point is worth half a penny at that level. A 25,000 point level that gets you a $250 certificate means you're now at the penny-a-point level. I had looked over my plan and thought a penny was the best that I could do. But then I saw a note that for 50,000 points they would give me a statement credit of $1,000. That meant that my points would now be worth two cents apiece! So the value was significantly higher than if I cashed them in at the lower levels.

So rather than redeeming the points at the 10,000 or 25,000 levels, I let them build -- knowing that not only were the new points going to be valued more, but I was also increasing the value of my existing points once the total reached the next level.

To me a statement credit was the best kind of reward, because it specifically reduced the amount I would have to pay toward bills on the account -- which meant less cash coming out of my bank account. And getting it to the highest reward value per point just made sense too.

So do a couple of quick calculations as to the relative value of your points as you accumulate them and certainly before you redeem them.

My other ideas about points: redeeming them for merchandise will often achieve a lower value per point than if you took a gift certificate to a store that might carry that type of merchandise. There are two reasons I say this:

First, redeeming it for points will generally be based on the suggested retail price, so a stereo valued at $300 might require 30,000 points (making it look like you are getting a penny a point). But what if you have a chance to get a gift certificate to an electronics store that often has great sales on stereos, say a $250 certificate for 25,000 points. You might be able to find that same stereo on sale for $250 or maybe even less, and get the same stereo while cashing in fewer points. So the net value of the points could be higher with a gift certificate than redeemed merchandise from the rewards program directly.

The other reason is that as models change, the one that's offered by the rewards program might not even be the latest model anymore. By using a gift certificate redemption, you can choose the make/model that is exactly what you want. And if you want the older model the program offered, the stores have probably dropped the prices even more when newer models came in.

Gift certificates at stores allow you to take advantage of store sales, so you can use them when sales are best, and probably up your point value higher than originally appeared if you buy things on sale.

The same thing with travel rewards. Maybe they offer you certain values on services through their travel agents for credits on flights. And the value-per-point might look good. But as I've discussed on this blog, there are lots of ways to find travel bargains. So let's say they offer a $250 travel credit for 25,000 points -- using their travel service. You might be able to find similar flights for much less than their offer -- and in this case taking a statement credit and booking the trip yourself might yield the same trip for less money you actually spend.

I hope these tips make sense. It might seem complicated, but the explanation is probably more long-winded than looking at your points program and analyzing where your points get the most bang for the buck.

Home-Buying Advice - Mortgage Points

This post isn't intended for a deal right now, unless you're looking for a home or refinancing a mortgage today. But I wanted to give a tip just for you to keep in mind when you might get to the point of buying a house.

Think twice before taking points on your mortgage. When we bought this house, our financial guy talked us into adding a point at closing to get a quarter-percent better rate on our mortgage. If you ran the numbers, it seemed like a decent idea, as the amount we paid would get balanced out after a few years by the lower payments we made. The presumption backing that up was simply the idea that we would own the house for that length of time.

What he neglected to mention (and we didn't have the acumen to consider) was the chance that we might refinance our mortgage. Within about a year, rates had dropped enough that the chance to get a lower rate was fairly straightforward. They had dropped lower than the rate we had gotten even with the point. We went ahead with a refinance, so we created a new mortgage. The new rate had nothing to do with the old rate, it was an entirely new transaction. So the points we paid the first time had no influence on our new mortgage.

This meant that we had paid 1% of the cost of the house for about a year's worth of lower interest, so we definitely didn't get as much benefit as we paid out. That taught me that when there are various ways circumstances may change, paying money upfront for something that won't balance out over many years is something to avoid. With the refinancing we didn't pay points (we actually refinanced a few times as rates kept going lower) -- thank goodness we only made the points mistake the first time and didn't repeat it.

At least we didn't initially go for an even bigger interest rate reduction and pay 3 points! That would've really been a lot of money down the tubes.

So my advice is to avoid paying the points, keep the money in your pocket, because you very well might not have that same mortgage for long enough to get the benefit that equals the balance.