Are You Wasting Your Credit Card Rewards on One of These Stupid Things?

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Not all credit card rewards are created equal. The value of some depend on your spending habits, others depend on your needs, and others yet are just plain bad investments. Here's what you need to know to evaluate the best — or worst — credit card rewards for you.

Various Credit Card Rewards

Here are seven different kinds of credit card rewards and the cards that can earn you these awards. I've ranked them from smart to stupid, but as usual, there are exceptions to every rule.

1. Frequent Flyer Miles

If you fly, then hacking the frequent flyer mile game with credit cards earning you points on every purchase and lucrative sign-up bonuses is a must-use strategy. Case in point: most of my long-haul flights are in business class, for less than the price of equivalent economy tickets. See Wise Bread's picks for Airline Miles Credit Cards with the best Sign-Up Bonuses.

2. Travel

Some credit cards are affiliated with specific frequent flyer mile programs, while others earn you universal points redeemable for multiple airlines or different types of travel reservations, including hotels and car rentals. These can be very flexible with lucrative options, but you need to pay attention to the value per mile. (See also: Top 5 Travel Reward Credit Cards).

3. Cash Back

Earning cash back on your purchases each month obviously affords you the most flexibility (but it's kind of boring). Generally, you earn an average of 2% cash back on purchases, with some cards giving you varying amounts depending on the type of purchase.

4. Groceries

Most grocery rewards are hybrids of cash back cards. Some are very store specific (the more store-specific the card, the less useful it is). Grocery rewards are often dependent on how and where you shop, and in some cases you only get cash back from specific purchases. (See also: 5 Best Credit Cards for Groceries).

5. Restaurants

Having a restaurant credit card is not an excuse to dine out! Some credit cards affording restaurant perks are again hybrids of cash back cards, with bonuses varying depending on the purchase. Although you might consider having a dining-affiliated credit card just for when you dine out, you might be paying for a privilege that doesn't even cover your annual fee.

6. Gas

Gas rewards are usually either expressed as a percentage savings on your total gas purchases, or a fixed savings rate per gallon. Beware: between annual fees, and having to drive farther (a cost of both time and money) to gas stations that service your card, you might actually spend more than you're saving. (See also: 5 Best Gas Rewards Credit Cards).

7. Blenders

"Blenders" is a euphemism for products that many reward credit cards offer. Although it might seem appealing to trade in your points for that blender or television or movie passes, more often than not you're getting stung. Why on earth would you use your points for an iPod Touch valued at $359 when you could use the same points for airfare totaling $1,500?

Determining the Value of Credit Card Rewards

Credit card rewards have both financial and intangible values; as with so many things, a clear answer is rarely easy to find.

Financial Value

A good baseline to aim for is two cents in value for every dollar you spend on the card. And since many cards earn you one point per dollar spent, it's a fairly easy calculation — at first. (See also: Credit Card Rewards Tips That People Don't Follow)

One way to calculate the value of credit card rewards is to divide the retail cost of the underlying reward by the number of points required to get the reward. For example, if it costs you 71,000 points for a product retailing at $360, you're getting half a cent worth of value per mile — bad value.

But this is also a crude way of calculating the value of points; it doesn't take into account sign-up bonuses, credit card annual fees, and other factors that skew your cost to attain each mile; not to mention the taxes and redemption fees that increase the cost of the reward itself.

Thus, we turn to the intangible redemption values.

Intangible Value

What's important to you? What do you need? And what might be a special treat that you couldn't otherwise afford?

These are all intangible factors that might go into your own perceived value of your points.

For example with frequent flyer miles, you usually get the best value in redeeming them for long-haul travel. Most often better value yet comes with a business class fare. Even if this isn't quite the case, I'm prepared to spend a few more miles to fly in business class, a luxury I wouldn't pay for if I had to fork out the cash, but one I really appreciate when lounging in style at the front of the plane.

Remember the Key Factors of Reward Value

Remember the following factors when determining the value (financial and intangible) of your credit card rewards:

• Annual credit card fees;

• Taxes and other fees paid to gain your reward benefit;

• Flexibility of your points and how they can be used.

Most importantly, to gain any value from credit card rewards, you must pay off your balances in full each month. Not doing so results in interest charges, which immediately reduce the value of any rewards, defeating the entire purpose of this exercise.

The Stupidest Thing to Waste Credit Card Rewards On

Although products (don't get the blender!) are usually the worst things to spend your credit card rewards on, there is an even bigger offender that depletes the value of your miles completely: Nothing. If you don't use your miles for anything, then there's no point in having a rewards credit card in the first place.

Have a plan for what you want to use your points for, stick to that goal (don't get sidetracked by the blender!), and spend those points. Waiting for a rainy day can backfire on you, as points can be devalued or policies can change.

How do you prefer to use your credit card rewards? Please share in comments!