Thanks to Sean McQuay of NerdWallet for a great conversation yesterday about credit cards. Look for it posted to NGPF Podcasts next week. He was discussing one of the cards he reviews which gave me an idea for a mini-activity in which students think about how best to redeem credit card rewards.  The card in question, the Citi DoubleCash Card, has the following terms:

Discover Citi’s best cash back credit card. The Citi Double Cash card is a cash back card that rewards you with cash back TWICE with 1% unlimited on purchases + 1% as you pay for those purchases. Learn why this has become one of Citi’s top cash back credit cards.

What Sean found attractive about this card was the fact it offers 2% cash back (1% on purchases and 1% on payments for those purchases) and it has no limits. This  makes it quite a bit simpler than those reward programs that offer different cash back percentages based on the spending category and often have limits also.

Here’s an ad that includes details about the cards and provides a sense of the marketing pitch: 

So, here is the question for your students:

In the first twelve months of having this card, Jarron purchased $2,000 worth of stuff using his credit card. He paid his bill, on time, every month over the course of the year and didn’t incur any additional fees or interest charges.

1. How much will Jarron have in his Citibank rewards program?
2. How should he NOT redeem his cash rewards based on the four options provided?

For ambitious educators who want students to dive into the minutiae of credit card disclosures, here is the document that describes eligible purchases, eligible payments and how to redeem your awards. For simplicity sake, you should assume that all of his credit card purchases fit into the eligible category and that all of his payments on these purchases are eligible for the 1% cash back too.

So, now the question is how should Jarron redeem his cash rewards. From the disclosures:

Redeeming Cash Rewards: As soon as the cash rewards balance totals $25 or more, you may visit www.citi.com or contact us at 1-855-473-4583 to redeem your cash rewards. You can choose to redeem your cash rewards as follows:

1. request a check for at least $25 up to the total cash rewards balance at the time you redeem;
2. redeem for a statement credit to your Card Account for at least $25 up to the total cash rewards balance at the time you redeem;
3. redeem for a gift card in set denominations from the available inventory.
4. redeem for a credit to your linked Citi savings or checking account or to a checking account from which you have paid a Citi Credit Card bill at least two times.

Only you may redeem cash rewards, unless you or we agree otherwise. You are responsible for any taxes that may be due on cash rewards redemptions.

So, the question again is which of the four options described above should be considered inferior as compared to the others?  Let’s go through each one, one by one:

1. A check seems like a pretty good option, as you get full value for your reward and can deposit it directly in your account.
2. Let’s say you choose option #2 and request a credit to your Card account. If the account credit was $80, thereby reducing your balance by that same amount, then you would lose the opportunity to get the 1% cash back on those payments, so you would lose 1% cash back on that $80 or about $0.80. While that may seem insignificant given the example provided, at higher reward levels, it might feel more painful. Besides why give up 1% of anything if you don’t have to?
3. Not sure what is meant by “available inventory”, but I always fear (and I have some history to justify this fear) that I will stash the gift card somewhere and forget to redeem it.
4. Getting it sent to a linked savings or checking account seems like a decent idea too, assuming that there are no fees to make that transfer.

As for taxes (that little line at the end that might send some hearts aflutter), well, based on this post on Investopedia, it comes down to whether the rewards program derives from a personal or business account:

According to the Internal Revenue Service (IRS), credit card rewards may be taxable as income. The types of rewards and the way in which you receive them determine whether they are considered taxable. In many cases, the rewards are viewed by the IRS as a discount, not as income. For example, a cash-back program for using your credit card is treated as if it were actually a post-purchase discount. There are some credit card reward programs that offer large sign-up bonuses, however, which the IRS may end up counting as taxable income.

As with any tax advice, best to always check with a professional!

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Check out the NGPF Activity on Understanding Your Credit Card Agreement

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.