If you use a rewards credit card to earn toward travel, you’re probably biding your time and holding onto those points and miles until you feel comfortable packing your bags again.
But what if you use a cash-back credit card? How long should you let those earnings build up before cashing out?
A reader recently wrote in to ask about that timing:
I have been saving my cash back rewards on my card for a while and have around $1,200 sitting there. My original thought was to save it for a big-ticket item, but I don’t know what that will be. Is it “unsafe” or “unwise” to just leave that money in there? I’d like to let it grow more but I’m also suddenly nervous that the money might just go away.
This question made all the alarms go off in my mind. A rewards balance of $1,200 is a huge amount of money, especially when you consider that most cash-back cards have earning potential of 1% to 6% of your spending, often with a cap on how much you can earn. Even with a signup bonus, this $1,200 balance represents potentially years of earnings.
And it’s not doing the reader any good by hanging out in that credit card account.
Cut the Cord on Cleaning: Dyson's V7 Motorhead Is $250 off at...
“There’s really no reason to keep your cash rewards in your credit card account,” said Dan Miller, founder of the Points With a Crew blog and owner of nearly 40 credit cards. “The only reason that I could see that is if it’s a situation where you maybe don’t have very good financial discipline and would just spend the money. So in some cases, there could be a reason that you’d want to make it at least a little difficult to access that money.”
But in this reader’s case, they’ve been diligent enough to let that balance rack up, so I think it’s safe to guess they have some modicum of self-control.
A better place to stash that money until you figure out what you want to do with it is in a savings account. Although the APY (annual percentage yield) for high-yield savings accounts fluctuates, let’s say you open an account that offers 1.5% interest. After a year, that $1,200 will grow to about $1,218.
That’s not a huge amount, but more than you’ll earn with that balance sitting in your credit card account.
Plus, a savings account—or even a regular old checking account—will have FDIC insurance, which means in the unlikely event that the bank fails, your money is safe. Your credit card account doesn’t have that protection for your rewards balance. Think of your rewards like a free gift with purchase, not like a paycheck.
The good news here is that cash-back rewards can’t be devalued like travel rewards can. Sure, your credit card issuer could decide that you’ll earn a lower cash-back rate on purchases, but it won’t change the value of rewards you’ve already earned. Meanwhile, if you have travel points, you might find that the balance you’d been saving up for a certain flight route no longer covers the cost of that flight.
The only time you might want to consider leaving that rewards balance where it is, Miller and I agreed, is if it’s worth more to redeem it in a different fashion. If you can use your balance for travel rewards or a statement credit or cash deposit, the balance may be worth more when converted to points for travel. Or, if you’re saving up for a purchase at a certain retailer that has a deal with your card issuer, your balance may be worth an extra percentage when you purchase through your card’s shopping portal.
“But if it’s just straight-up cash rewards, I would take the money out,” Miller said. “Put it in a savings account or other emergency fund if you don’t have an immediate need for it.”
