Why you should not hoard your credit card rewards

It is not a well known fact that credit card in Singapore are extremely generous compared to other international markets globally.

For instance, the best cashback credit cards in the US provide 1.5 per cent-2 per cent reward rates, while the UK market is even worse with most credit cards being simple balance-transfer cards without much benefits to speak of.

In contrast, the best credit cards in Singapore easily provide five per cent or greater rewards in cashback, miles and discounts.

Given this, card users in Singapore have built a habit of hoarding a bunch of credit card rewards, mistaking them for a war chest that they should be saving for the off chance they might need to use in the future. However, this is a financially inefficient behaviour.

Credit card rewards are not like savings accounts or holographic Pokemon cards that grow more valuable over time. Instead, they almost always lose value. Various loyalty programmes are great for earning perks and saving money, but they aren't the best place to keep a small fortune.

In fact, the longer you sit on your stash while saving for some far-off dream vacation or emergency, the more you expose yourself to risks like inflation, devaluation and reward forfeiture.

You can lose your rewards through devaluation and expiration

Seasoned investors will know that their should not be touching their stock investments too often. However, the same instinct will almost always backfire if you treat your credit card rewards the same way.

For instance, if you don't use your credit card for too long, your bank can close your account because of inactivity, causing you to forfeit your rewards that you've stacked up for a long time.

While such an extreme scenario may sound unrealistic to many, there are plenty of other ways that banks can change the value of your rewards, especially miles and points.

For instance, airlines themselves are cutting costs by reducing luxurious benefits, and have been known to reduce the value of each mile over time. If your 100,000 miles are worth S$1,000 today, it may only be worth S$900 in a few years.

Similarly, banks could increase the amount of points you need to earn to qualify for certain benefits, from requiring 1,000 points to 1,200 points for a 15 per cent discount on your dining bills.

In other cases, they may charge you more for each time you transfer your miles into an airline's loyalty programme. And given the cost-cutting trend for financial institutions in Singapore, any of these things probably will at some point, for reasons such as rising expenses, competition or financial pressure.

That's not all. Many mile programmes have expiration date: your points and miles may only last for one to three years before becoming invalid. Given these, it's actually wise to keep using your points and miles whenever you have built up enough balance to be redeemed for something you need.

Inflation chips away at the value of your rewards

If your credit card offers cash back or travel statement credit, you probably won't be too impacted by airlines and banks changing the value of your rewards or the price of award tickets overnight. However, even if banks and airlines don't do anything, the vale of your reward miles can decline on its own because of inflation.

In fact, every form of money loses its value over time because of inflation. Because almost everything costs more over time, you need to be making more money than you did five years ago to maintain the same quality of life. While the value of your cash can increase through savings accounts or stock investing, however, the value of your credit card rewards will only decrease.

The longer you keep your cash-like rewards with your issuer, the more inflation will chip away at your bonus miles' purchasing power, even if banks don't do anything to devalue your points. Reward accounts are not savings accounts, and they will never earn interest for you.

How you should manage your rewards

"Don't hoard your credit card rewards" is easy to say, but it might not be very intuitive to actually carry out in daily life. After all, Singaporeans are known for their propensity to save. For those people whose rewards are piling up, here's how to deal.

First, if you have built up a nice balance of airline miles on your card, you should try to use it at least once a year for your vacation. If possible, staying up to date with special promotions and bargain air tickets can be a helpful way to ensure you get the most value out of your miles.

You can scope out offers yourself by reading your loyalty programme's promotional emails, monitoring award prices online and using travel-booking comparison apps.

This way, you won't forget to use your miles when you can, and score a nice vacation for cheap, killing two birds with one stone.

Secondly, you should try to redeem points into miles so that points don't expire. Miles tend to have longer expiration date (many programmes even offer miles that never expire), while they also benefit from the fact that their values cannot be as easily changed by the bank as value of points.

ALSO READ: Best credit card promotions in Singapore (June to July 2024): Citibank, DBS, HSBC, UOB, and more

This article was first published in ValueChampion.