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
cash back credit cards in the US provide
1.5%-2% 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 5% 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 behavior.
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 programs
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.
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% 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 program. And given
the recent
trends in cost cuts 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 programs have expiration
date: your points and miles may only last for 1-3 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.
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 5 years ago to
maintain the same quality of life. While the value of your cash can
increase through savings accounts or stocks, 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.
“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 program’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 programs 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.
The article originally appeared on ValuePenguin.
ValuePenguin