After earning the $200 initial spending bonus on your CashForward card, your optimal redemption path will be to first redeem an amount equal to (cash_back_you_have_available_to_redeem – $50) / 0.95, then immediately do a second redemption for $50. This is better than simply redeeming cash_back_you_have_available_to_redeem by $8.68 or more.
With many things in personal finance, the obvious path is not the optimal path. Missing out on taking the optimal path can be especially irksome when it would have been just as easy as taking the obvious path. In this regard, redeeming credit card rewards can be especially fraught.
In this post I’m going to give you the optimal path to follow when doing your first two cash back redemptions on a new Barclaycard CashForward™ World Mastercard®. Note that I specifically said first two redemptions, since doing a single redemption is the obvious, but not the optimal, path.
You may be thinking, “Wait, I know that redeeming flexible points like Starpoints, American Express Membership Rewards points, Chase Ultimate Rewards points, etc. can be tricky, but we’re talking about a cash back card here. What could go wrong?” In the case of the CashForward card, the difference between an optimal redemption and the obvious first redemption is at least $8.68, but probably a little more than that, depending on how far over the $1,000 threshold you go in order to get the $200 bonus.
Something on the order of $9 extra is not a lot, but it’s worth noting that the same kind of thinking I outline below also applies to other reward cards that give you some of your points or miles back each time you redeem them and for which there is a minimum allowed or minimum useful redemption amount. Cards that fall into this category include
- Barclaycard Arrival Plus® World Elite Mastercard® (5% of miles back; $100 minimum redemption) and, to a lesser extent, cards like
- IHG® Rewards Club Select Credit Card (10% of points back) and
- The Business Platinum® Card from American Express OPEN (35% airline bonus)
I’m using the CashForward card as the prime example in this post because the reasoning for it is straightforward and fairly universal across cardholders. With the other cards I mentioned, the optimal path will be more constrained by the particular travel expense redemption options that are useful to you.
The pertinent bullet points for the CashForward card’s offer, as of September 25th, 2017, are:
- Get a $200 cash rewards bonus after you spend $1,000 in purchases in the first 90 days after account opening
- Earn unlimited 1.5% cash rewards on every purchase. Every time you redeem, get a 5% cash rewards redemption bonus to use toward your next redemption
- Redeem your cash rewards for a deposit into a U.S. checking or savings account, a statement credit or gift cards. Redemptions start at $50
The parts that make the optimal redemption a bit trickier than your typical redemption are the fact that you get back 5% of what you redeem (e.g. if you redeem $200, you get another $10 to redeem on your next redemption) and the minimum redemption amount is $50.
The obvious path
Let assume you spent exactly the $1,000 needed to earn the $200 initial spending bonus and now you want to redeem your cash back as a statement credit. You’ll have the $15 cash back you earned as 1.5% of your $1,000 in spending, plus you’ll have the $200 initial spending bonus, giving you a total of $215 available in cash back.
The obvious path is to just redeem your $215. You’ll get 5% of that back, so you’ll be left with $10.75 unredeemed, since the minimum amount you can redeem is $50. This may not be a big deal to you, especially if you plan to just keep using the CashForward card as a daily driver. But people with better daily drivers such as the Citi® Double Cash Card, which earns 2%, may choose to just stop using their CashForward card right there.
The optimal path
The optimal redemption minimizes the amount of unredeemed cash back you are left with at the end. To achieve that, your first redemption amount needs to be just large enough to leave you with exactly $50 for your second redemption, which can be made immediately after your first redemption since the 5% redemption bonus is immediately credited to you.
Solving for the optimal redemption
Let’s call the total amount of cash back you have available to redeem after receiving the $200 initial spending bonus “cash_back_you_have_available_to_redeem” and the amount you should use for your first cash back redemption “optimal_first_redemption_amount”. Then we can just solve the following equation for optimal_first_redemption_amount …
cash_back_you_have_available_to_redeem – optimal_first_redemption_amount + .05 *optimal_first_redemption_amount = $50
… like this …
-0.95 *optimal_first_redemption_amount = $50 – cash_back_you_have_available_to_redeem
optimal_first_redemption_amount = ($50 – cash_back_you_have_available_to_redeem) / -0.95
optimal_first_redemption_amount = (cash_back_you_have_available_to_redeem – $50) / 0.95
So, for example, if you spent exactly the $1,000 needed to earn the $200 initial spending bonus and have $215 available to redeem, your optimal first redemption amount is ($215 – $50) / 0.95, which is $173.68.
So, in that example, the optimal path is: Redeem $173.68. Then redeem $50. That makes your total redemption $223.68, which is $8.68 more than the $215 you get from the obvious path. After the second redemption for $50, you’re left with just $2.50 unused instead of the $10.75 that’s left over by following the obvious path.
If you spent more than just the minimum $1,000 required for the bonus, then your optimal first redemption amount will be a bit more than in that example and the extra cash back you get from following the optimal path will be a bit more too.
If you’re especially into initial spending bonuses, you might want to try out our tool for finding cards with good sign-up bonuses that fit your spending pattern.