Reward Points: Do you shop a lot for reward points? Is this a loss-making deal more than a gain?

‘Get 5 times reward points on shopping this weekend!’… ‘Get bonus points on every spend during festivals!’… Such messages and emails keep coming to the phone of every person who uses a credit card. These offers look so attractive that we often end up shopping for things that we probably don’t even need. There is only one thing going on in the mind – ‘Well, the money is being spent, at least we will get some points.’

But have you ever thought with a calm mind about what the real value of the reward points for which you are spending thousands of rupees? Are these points less of a profitable deal and more of a sweet trap of loss? Come, let us understand here everything related to reward points that is important for you to know.

Why do these reward points look so attractive?

A very deep psychology works behind this. When we get something ‘free’ on spending, our mind feels happy. We feel that we are making a smart deal. Credit card companies take advantage of this human nature. They entice you to spend more by luring you with points, because they get a commission (MDR charge) from the merchant on every expenditure you make.

Understand the real math of reward points.

To understand this game, it is important to first know the real value of these points.

Points on spending: In most credit cards, you get 1 reward point for spending Rs 100 to Rs 150.

Value of points: When you go to redeem these points, the value of 1 reward point is often 25 paise (₹0.25). In some premium cards, it can be up to 50 paise or 1 rupee, but we are assuming an average.

Now see an example:
Suppose you want a shopping voucher of Rs 1000.
For this, you will need 4000 reward points (4000 x ₹0.25 = ₹1000).

To earn 4000 points (if you get 1 point for ₹150), you will have to spend Rs 6,00,000 (4000 x 150)!

Yes, you spent Rs 6 lakh to get a 'free' voucher of Rs 1000. This is about normal spending. Now let's know its disadvantages.

4 biggest disadvantages of reward points

First - Trap of unnecessary spending

Thinking that you will get 1000 more points, you buy something worth Rs 5000, which you did not need. You lost Rs 5000 for 1000 points (worth Rs 250). What kind of benefit is this?

Second - Heavy burden of interest
The greed for reward points proves to be the most dangerous when you are unable to pay the entire bill on time. Suppose you did unnecessary shopping of Rs 20,000 in a month in pursuit of points, and you were unable to pay the bill on time. Credit card charges an interest of 40-42% per annum (about 3.5% per month).

The interest for one month on Rs 20,000 is Rs 700.

By spending Rs 20,000, you would have earned hardly 133 points (worth about Rs 33).

The result: For a profit of Rs 33, you took on the interest of Rs 700. What can be a bigger loss-making deal than this?

Third - Web of terms and conditions
Expiry date
Most reward points expire in 1-2 years. If you do not pay attention, all your hard work will go to waste.

Redemption fee
Sometimes you have to pay a processing fee to redeem the points.

Capping
Sometimes there is an upper limit on how many points you can earn in a month.

Fourth - Devaluation of points
The bank can reduce the value of its reward points anytime. It is possible that the point which is worth 25 paise today, the bank may make it worth 20 paise tomorrow. You have no control over this.

So are reward points useless? No! Become a smart user like this
This does not mean that reward points are completely useless. If you use them smartly, they can really be beneficial.

Spend only what is necessary.
Spend only what you were going to spend from cash or debit card also. Do not make your shopping list for points.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.