Who does not like to get things for free? Credit card reward points is a case in point. Many of us accumulate huge reward point balances either due to inertia or wait to use those points in the best possible manner. If you belong to the this category of card holders, you need to appreciate the possibilities that can affect the value of these reward points adversely.
There Is Nothing Wrong in Accumulating Reward Points
After all, this comes free. You do not have to pay anything extra for it (assuming you are not paying an annual fee). If you have agreed to pay an annual credit card fee to upgrade to a premium card and earn more rewards points, you must do a proper cost-benefits analysis. Moreover, however convoluted the entire structure to redeem rewards may appear, you may still be able to figure out the best usage of reward points for yourself. I have discussed such planning in detail in this post.
What Is the Risk in Accumulating Too Many Credit Card Reward Points?
The biggest risk that you run is that your bank may choose to devalue the points. For instance, let’s say 4 reward points on your credit card are equal to Rs 1 today. There is absolutely nothing you can do if the bank chooses to change the conversion ratio to 5:1 tomorrow i.e. 5 reward points will be equal to Rs 1. In fact, on the bank’s part, there could be an incentive to attract you to spend on their cards by offering generous reward points and then gradually continue to devalue those points. It is not that bad though. You can also use credit card reward points to purchase items from the rewards catalogue, purchase loyalty rewards (airline miles or hotel stays). Devaluation in this case would mean increasing the price of items or the conversion ratio.
Do note many banks give you an option to use reward points to set off your credit card bill or even make payment using your reward points. In such a case, you save money since you do not have to transfer money from your bank account. By not using your reward points to set off your card bill, you are foregoing the income that you could have earned on the money saved. In contrast, your reward points will always carry the risk of devaluation.
Let’s say you have 2 lac reward points on your credit cards. You want to make a purchase of Rs 50,000. Your bank allows you to make the payment for the purchase in reward points. The conversion ratio is 4 rewards points to Rs 1. To make the payment for Rs 50,000, you will have to redeem your entire reward point balance of 2 lacs points. Let’s further assume that this was the only purchase you made during the month.
Scenario 1 — You Use Your Reward Points
Since you paid from your reward points balance, you do not have to transfer anything from your bank account to settle the credit card bill. Now, this Rs 50,000 can be used to make an investment. Let’s pick up the simplest investment of a fixed deposit. If you earn 6% on a fixed deposit, this Rs 50,000 will become Rs 53,000 in 1 year before taxes. On the flip side, your credit card reward point balance is now zero.
Scenario 2 — You Do Not Use the Reward Points
You choose not to use the reward points to fund the purchase. When the credit card bill becomes due, you transfer the money from your bank account. That’s Rs 50,000 gone from your bank account. You retain your credit card reward points though. Don’t expect the bank to improve the conversion ratio (from 4:1 to 3:1). Even if the bank maintains the status quo, your Rs 2 lac reward points will still be equal to Rs 50,000 after 1 year. Remember you could have gone to Rs 53,000 in Scenario 1.
Therefore, if you are hoarding points to convert to cash later, it is not a good choice. Unless you can find a good deal where your Rs 2 lac reward points are worth more than Rs 53,000 after a year, it does not make much sense to keep hoarding something that is very likely to devalue.
Let’s say it takes 3 reward points on credit card from bank X to buy an airline mile from Airline Y. And it takes 5,000 airline miles on Y to book a flight from Mumbai to Delhi. If you look closely, you are running two risks here. If you use the miles today, you may be able to book Mumbai-Delhi flight for 15,000 reward points.
After a few months, the conversion ratios may change. It may take 4 reward points to buy an airline mile. And the cost of Mumbai-Delhi flight may change from 5,000 miles to 6,000 miles. In such a case, you will need 24,000 reward points to book Mumbai-Delhi. If you see, the reward points have been devalued by 60% by as much as stroke of a pen (in this case, an e-mail). You may argue that the conversion ratios may change for the better. Well, that is a possibility too but let’s be honest. What are the odds of that happening?
Closer to me, my credit card allowed me to purchase Westside voucher of Rs 500 for 1,700 reward points about 18 months back. Now, I need 2,000 point to purchase the same voucher.
What Should You Do?
I am not saying that you must use the points as soon as you get them. Depending on your usage pattern and your credit card tie-ups, you may be able to get good deals on your reward points. At the same time, you need to appreciate the possibility of devaluation of these reward points. If you have only a few reward points, it may not be worth spending your time and effort on this. However, if you have been accumulating points for a few years and have a huge reward points balance, you need to rethink your strategy.