5 Credit Card Rewards Pitfalls to Avoid This Holiday Season

Grab your wallet because the busiest time of the year for spending is upon us. Despite persistent inflation and dwindling household savings, shoppers are planning to drop up to an estimated $967 billion during this holiday season, a November 2023 study by the National Retail Federation shows.

The Consumer Financial Protection Bureau, in a 2023 report, estimates that 74% of adults in the U.S. had a credit card account in their name as of the end of 2021. And a 2023 NerdWallet survey found that nearly 3 in 4 Americans (74%) are planning to use their card to pay for holiday expenses.

If you’re sitting on a stash of points or miles, you may be tempted to use them to offset holiday purchases. And when you’re trying to stick to a holiday budget, this can seem like a great idea. It may not provide an optimal value, but many people aren’t trying to wring the most out of every point. And that’s OK. If you’re responsible with your credit and using your rewards card wisely, you’re already ahead.

But if you want to get the best value from your credit card reward points, here are five pitfalls to avoid this holiday shopping season.

Since the pandemic, a growing number of credit card rewards programs have implemented a “pay with points” option at popular merchants like Amazon and Best Buy. This allows cardholders to easily use their points to directly offset the cost of their purchase at checkout. The problem? Many shoppers don’t realize that point values are often diminished when they are redeemed this way.

For example, the industry-standard value is a penny per point. But paying with points at checkout often gives 20% to 30% less value. By comparison, points earned from some credit cards can be worth up to 1.5 cents each toward travel, with the potential for even value when transferred to an airline or hotel travel partner.

You also won’t earn rewards on purchases when you pay with points. Even if you want to redeem rewards for cash back, you’d be better off charging the purchase on your card to earn rewards and redeem rewards for cash or statement credit to cover the purchase later.

Many credit card issuers offer the ability to redeem your miles and points for goods through a catalog or digital shopping mall. But think twice before you pay for those new AirPods for Dad with your rewards.

Redeeming points for merchandise through your credit card’s digital shopping mall will rarely provide good value. These malls often have higher prices than if you were to buy the same product elsewhere. That means that even if it seems like you’re getting a typical 1 cent per point value, they’ll actually be worth less since the items may be overpriced.

When shopping, you might be offered an opportunity to open a new credit card at checkout to score an immediate discount. While this might seem like a good deal, retail store cards are often a less valuable choice in the long run. The rewards earned are usually limited to more goods from that retailer and often expire quickly. Plus, credit limits are typically lower than a general rewards card, and interest rates are higher.

If you’re in the market for a new rewards card this holiday season, you’ll likely do better applying for a general cash back or travel rewards card to earn rewards that have more flexibility. These cards also tend to offer more valuable sign-up bonuses than retail cards. The Wells Fargo Active Cash® Card, for example, has this offer: Earn a $200 cash rewards bonus after spending $500 in purchases in the first 3 months.

If you have a travel rewards card, you naturally want to use your points toward travel. But be aware that travel booking portals through your credit card can have very different point values depending on your card, its issuer and the type of booking.

For example, booking flights, hotels and rental cars with Chase rewards offers a steady value between 1 and 1.5 cents per point, depending on which card you have. American Express, on the other hand, offers a value of 1 cent per point toward airfare and specific luxury hotels. But the value drops to 0.7 cent per point when redeemed for other hotels and rental cars.

Transferring your rewards to a travel partner’s loyalty program often gives better value, but not always. Some card issuers also charge a fee to transfer points to partner programs.

Most airline, hotel and travel credit card rewards programs give you the option to donate your miles and points to select charities. This can sound like an appealing win-win for both you and the charity. You donate your unused rewards and the charity receives a cash contribution.

However, many loyalty programs don’t divulge the cash value a charity will receive for your donation. Another catch is that you won’t get a tax deduction because the IRS generally doesn’t view rewards as income.

If you’re conscious of cash flow but still want to make a charitable gift, consider donating cash rewards from your cash back credit card instead. If you redeem the cash rewards, then make a cash donation, you’ll get good value for the rewards and also qualify for a tax deduction.