I've Had the Discover it® Cash Back Card for 18 Months. Here's Why I've Been Using It Wrong

The Discover it® Cash Back card is hands down one of my favorite credit cards. I'm a big fan of its 5% rotating quarterly categories (sign-up required, $1,500 spending cap), which align perfectly with the way I spend money, and was blown away by the card's welcome offer -- an unlimited cash back match for the card's first year. 

I thought I was pretty cool when I scored about $1,645 in my card's first year, but truthfully -- I didn't even scratch the surface on what this card can do. In fact, I left between $80 and $330 on the table. And, no, my problem wasn't in how I used the credit card itself. Rather, it was in how I redeemed my cash back. And if you, like me, thought statement credits or cash deposits were the best way to use this card, then you too are in for a nice surprise. 

Redeeming cash back for gift cards will give you the most value 

Discover doesn't advertise its gift cards frequently, so the option to redeem your cash back in this way can be easy to overlook. But if you shop where Discover gift cards are available you can get between 5% to 20% of added value. 

For instance, Discover will add 20% of value when you redeem cash back for a gift card to Bath & Body Works, Nike, or Under Armour. That means, if you have $12 in rewards, you can redeem it for $15 at these three stores. The value grows the higher the gift card you redeem. A $200 Nike gift card, for instance, can be purchased for $160 in rewards -- $40 of added value simply for choosing a gift card instead of cash back. 

Discover has roughly 100 merchants you can choose from, including the following (list taken from Discover's website): 

Added value: 20% (Redeem $0.80 in cash back for $1 in gift cards):

• Bath & Body Works 
• Nike
• Under Armour

Added value: 15% (Redeem $0.85 in cash back for $1 in gift cards): 

Added value: 10% (Redeem $0.90 in cash back for $1 in gift cards):

Added value: 5% (Redeem $0.95 in cash back for $1 in gift cards):

This gives you a good variety of gift cards, from travel (Airbnb and Hotels.com) to delivery services (Uber, DoorDash, GRUBHUB) to restaurants, clothing stores, entertainment, and even Amazon. 

Had I known beforehand that I could redeem my $1,645 cash back for discounted gift cards, I could have gotten between $1,730 and $1,974 for my rewards. That's roughly $82 to $329 in added value just by redeeming for gift cards.  

When gift card redemptions aren't worth it 

With the exception of Big Lots!, Walmart, Target, and possibly Amazon, most of the merchants above could be classified as consumer discretionary, meaning they sell stuff we want but don't need. If you need cash back to pay for your necessities -- like utilities, housing, or debt -- I wouldn't let the gift cards entice you into spending money that could be saved for other more urgent expenses. 

Another argument against gift cards is opportunity cost. Let's say you redeem your $190 cash back for a $200 Amazon gift card at a time when Discover is also giving 5% back on Amazon purchases. If you had spent that $200 directly at Amazon, you would have earned $10 back. That essentially nullifies the 5% value Discover added into the gift card, which also equals $10. It doesn't quite work that way for every option, but it's something to keep in mind. 

If you're already shopping at these stores, however, redeeming cash back for gift cards could make your rewards last longer. It might not always work for you but when it does -- you can squeeze more value out of your credit card.