There are typically three types of benefits that you get when you transact using a credit card.
- Upfront discount
- Reward points & miscellaneous benefits (fuel surcharge waiver, airline miles etc.)
The benefits for spending on a credit card might take on many other forms too. However, I believe it will fall into one of these categories.
Upfront Discounts and Cashbacks
I prefer the upfront discounts and cashbacks the best because the value impact is so much easier to assess. For instance, if you were to make an online purchase on Amazon or Flipkart, these portals may either offer an upfront discount on the purchase or offer you cashback. In case of upfront discount of 5%, a gadget costing Rs 20,000 may cost you only Rs 19,000. i.e., you will have to pay only Rs 19,000 for the purchase.
Cashback is essentially a credit to your credit card statement. Typically, Cash backs happen a few months after the purchase. If you purchase an item worth Rs 20,000, your credit card still gets charged Rs 20,000. However, after a few months, you will get a cash back of Rs 1,000 in your card statement. The amount is used to set off the balance in your account.
Clearly, you would prefer an upfront discount since you know at the outset if you are getting the benefit or not. Cash back schemes may have some associated terms and conditions. For example, there may be a minimum purchase amount to qualify for cashback. The key point is that it is not too difficult to miss an important condition. These upfront discounts are not just available on online stores. These are available at restaurants, departmental stores, shopping malls, flight booking etc. However, discounts and cashbacks may not be available all the time and on all the credit cards. Amazon may offer discount on Citibank credit Card. What if you don’t own a Citi Bank card? Flipkart may offer on Axis and Croma may offer on HDFC credit cards. You just can’t keep applying for cards to avail such discounts or cashbacks.
A benefit that is always present is in the form of reward points. Whenever you transact using your credit card, you get some reward points. The number of reward points you get is a function of:
- Your spend amount. For instance, if you spend Rs 100 on a particular credit card, you may get 1 reward point. Please understand the ratio of reward point to spend may vary across cards.
- Place you have used the credit card. Sometimes when you use your card on your particular site or in a particular store, you get better rewards. For instance, instead of 1 reward point per Rs 100 of spending, you may get 10 reward points per Rs 100 of spending for shopping on a particular website or a store.
Redeeming Reward Points
If you are new to credit cards, you might get the impression that 1 reward point is equivalent to Re. 1. That is not the case. Typically, a reward point has much less value than Re. 1. American Express allows you to set off reward points against your card bill. With American Express Gold card, 4 Reward Points is equivalent to Re. 1 (1 Reward Point = 25 paise). Therefore, if you have accumulated 4,000 reward points, you can reduce your bill outstanding by Rs 1,000. By the way, not all credit card companies may allow you to set off against your outstanding card bill. Banks or credit card companies may change this ratio anytime. For instance, today 1 reward point may be equal to 25 paise. After a few days, it may be changed to 20 paise/reward point. Therefore, even though the number of reward points stay the same, the value of the rewards points can be easily brought down.
Credit card companies have a rewards catalogue. Essentially, you can redeem your reward points against items/packages in the rewards catalogue. The range of offerings under rewards catalogue can be quite wide. You can use points to purchase hotel/travel vouchers, gift vouchers, accessories, apparel, gadgets, books, beauty and wellness packages and many more items. You can use reward points to make air ticket bookings or hotel bookings. And it does not end here. The range of reward catalogue may vary across credit card issuers.
How to Use the Reward Points Smartly?
As we have seen above, the value of reward points may not be as much as you expected. From what I have seen, purchasing gadgets/electronic items using your rewards points may not be the smartest choice. You are likely to be short changed. Though it is preferable to have an option of settling your reward points against your outstanding bill, using reward points for statement credit may not be the smartest choice. There could be attractive travel opportunities. Let’s consider a few examples from American Express Gifts catalogue.
Apple IPad Pro 9.7 32 GB costs 224,500 reward points. 224,500 is equivalent of Rs 56,125 (with Amex Gold Card, 1 Reward Point = Re. 1). On Flipkart, you can purchase the same iPad for ~ Rs 40,000.
Therefore, you can use your American Express card to purchase iPad on Flipkart and use the reward points to settle the bill (statement credit card). You will still be left with Rs 16,125. Clearly, not a good idea to use reward points for gadget purchase.
A WestSide gift card worth Rs 500 is available for 1,700 reward points. So, if you have 17,000 reward points with you, you can use those points to purchase vouchers worth Rs 5,000. If you were to use these points for statement credit, you would get a credit of Rs 4,250. Clearly, if you plan to shop at Westside, purchasing a voucher is a better choice than statement credit.
I checked the catalogue for various offers for hotel stays. Vouchers of Rs 5,000 for many 4-5 star rated hotels are available for 13,400 reward points. 13,400 reward points may give you a statement credit of only Rs 3,350. So, purchasing a hotel voucher/gift certificate is a better choice. However, you must understand you may be able to get discounts on room tariffs if you book through a third party travel portal (goibibo.com, MakeMyTrip.com, Yatra.com etc.) or if you negotiate directly with the hotel.
Similarly, you can exchange reward points for air miles. You need to see if it is worth it. Sometimes, multiple conversions can leave you baffled.
Do note there is no generic answer. I have chosen options to suit my argument. It is possible that your credit card may offer attractive options for gadget purchase. However, the idea is you should get anchored about how to use credit card reward points. Be open, be analytical and use the points to maximize benefits. Based on your spending pattern, pick up cards that offer rewards that you can use smartly.
These offers of upfront discounts, cashbacks or reward points may make you spend more on your card. You need to exercise discretion. Many credit cards with better rewards have an annual fee. While deciding to pick up such cards, do weigh in the potential benefits against the annual fee. You need to see if you really need those specific rewards. For instance, if you don’t travel much, then cards with air miles rewards may not really be helpful.