3 Underrated Ways to Use Your Credit Card Rewards

When you have a rewards credit card, you'll need to figure out how to use the rewards you earn. Whether it's a cash back card or a travel card, there are usually several redemption options.

The most popular choice is also the easiest one. Half of all cardholders redeem rewards toward their credit card balances, according to a recent study on credit card habits by The Motley Fool Ascent.

That's a good way to use your rewards, but there could be some better options available that get you even more value. Here are a few ideas to consider.

1. Invest them in the stock market

Instead of using rewards to save cash right now, what about using them to build wealth? Lots of people aren't able to invest as much as they'd like because of all the bills they have. Your rewards could be a great way to boost your investments.

Let's say you earn $500 per year in rewards and decide to invest it. The average stock market return is about 10% per year over the long run. If you earn that much, then after 20 years, you'll have contributed $10,000 total, but it will be worth $31,501.

If you're interested, there are a couple of ways to invest credit card rewards. You could see if your brokerage has any rewards credit cards available. A few brokers have cash back cards that allow you to send your cash back directly to your brokerage account.

You could also do this with any card that lets you redeem rewards as cash back to your bank account. Once you've deposited your cash back, you can send it to a taxable brokerage account, or either of the following types of retirement accounts:

• Individual retirement account (IRA)
• Roth IRA

2. Transfer travel rewards to your favorite airlines and hotels

Many of the top travel credit cards let you transfer points to their travel partners. The card issuer partners with certain airlines and hotels, and you can send your points over to their loyalty programs.

For example, let's say you have a travel card that has United Airlines and Hyatt as transfer partners. If you want to book a flight with United, you could transfer your points to United to turn them into miles. If you want to book a hotel stay with Hyatt, you could transfer your points there and turn them into World of Hyatt points.

This is a useful option because you can get much more value from your rewards this way. When you redeem rewards toward cash travel purchases, you normally get $0.01 to $0.015 per point, depending on the card. At that value, 100,000 points is worth $1,000 to $1,500.

I frequently get $0.03 or more in value by transferring my points and booking award travel. Those same 100,000 points can be worth $3,000 to $4,500 or more this way. Only 14% of cardholders transfer their points, but if you like to travel, it's often the best option.

3. Use cash back to buy discounted gift cards

This is a simple way to squeeze more value out of cash back. Before you redeem your rewards as cash, see if your card issuer gives you the option of redeeming it for gift cards. Many card issuers do, and they also often have discounts available with some retailers.

I've seen discounts ranging from 5% to 20%. So if you want to buy a $100 gift card, you may be able to get it by redeeming $80 to $95 in cash back.

Make sure you'll be shopping with that retailer soon if you decide to do this. It doesn't do you any good to buy a gift card that ends up sitting around unused for months. In that case, you'd be better off taking the cash back option. But if you know you'll be buying something from a retailer in the next week or so, then a discounted gift card is worth it.

Learning about your credit card's rewards program can pay off. The easiest redemption option isn't always the best deal. Most rewards cards have at least one of the options above available, and some have all three.