06/24/2015 09:52 am ET Updated Jun 23, 2016

How to Use Credit Card Rewards for Savings

Americans are fortunate enough to enjoy a robust market for credit cards. The industry is so competitive that card issuers regularly offer customers rewards for their spending in the form of valuable points, miles, or cash back.

For some credit card users, it can seem like a good idea to use a card that earns cash back and dedicate these proceeds to their savings accounts. However, doing so is not as simple as it may appear, and it may not be the best use of your rewards.

Does Your Rewards Program Allow You to Save?

First, cardholders need to understand how their cash back will be earned and what can be done with these savings. For example, some cards will automatically issue cash back rewards as a statement credit to their account. So in these cases, cardholders are essentially receiving a discount on their purchases in the form of a lower bill they need to pay.

So in order to dedicate their rewards to their savings or investment accounts, cardholders would need to transfer money, equal to the amount of rewards earned, from their checking account to their savings or investment vehicle.

3 Credit Cards That Invest Your Rewards

Thankfully, there are some cards that will accumulate rewards in such a way that cash back can be redeemed directly into a bank account.

  1. Discover Card offers cash back rewards that can be electronically deposited into the cardholder's bank accounts at any time, with no minimum requirements. Cardholders can easily log into their Discover account online and choose to redeem cash back into their bank account.
  2. The Fidelity Investments Rewards American Express Card offers 2% cash back as a deposit into any qualifying Fidelity investment account. You can direct your rewards into one account or divide them up in as many as 5 different accounts. Family members can also link up their Fidelity Rewards cards to your Fidelity account, and you can set up automatic point redemptions.
  3. The Upromise World MasterCard offered by Sallie Mae lets cardholders use their cash back savings to fund a tax deferred 529 college savings plan, pay down a student loan, or invest in a high-yield savings account.

There are some credit cards associated with investment brokerages that don't offer this feature, so be sure to check the terms and conditions. For instance, Morgan Stanley offers two different credit cards from American Express which offer rewards in the form of points through the Membership Rewards program. While these points can be extremely valuable when transferred to miles with their airline transfer partners, cardholders can only redeem them for half of a cent each towards statement credits, which does not go towards a savings account and is not a very competitive rate of return for a cash back rewards card.

How Not to Use Rewards Credit Cards

One potential issue with using rewards credit cards is when consumers carry a balance. Those who carry a balance on their credit cards are incurring interest charges every day, the cost of which will dwarf any earned rewards. In addition, the interest rates on credit cards are far higher than the rate of return most people can expect from their investments, so those with credit card debt will be much better served by paying off their balance or redeeming the rewards as a statement credit, rather than investing those available rewards.

Finally, those who are having trouble controlling their spending and staying out of debt are not the best candidates to be rewarded for making additional credit card charges, even if those rewards are ultimately dedicated to their savings. The ideal cardholder for these types of products will be someone who pays their credit card balance in full each month, but otherwise has a difficult time contributing to their savings accounts. These cardholders will appreciate how their savings and investment accounts grow based on their credit card usage, without having to do anything on their part.