When it comes to credit card rewards program, most cardholders have this common myth: the more you spend, the more you earn, and the more you save. However, with reward points, earning is only half the equation, the actual value-back lies in how you redeem those points.
You can benefit from reward points in two ways:
- At the earning stage, by earning accelerated rewards on certain spending categories
- At the redemption stage, by redeeming the reward points against the category offering highest value as per your lifestyle
So, if you have only been focusing on how many reward points you are earning, it is time to shift your focus to the overall reward rate, that is, how much actual rupee value you get per point at redemption.
Let’s understand why this matters and how to choose the best redemption option as per your lifestyle.
More Reward Points ≠ More Value-Back
Most consumers think that a card offering 10 reward points per Rs. 100 spent is more valuable than a card with just 5 reward points per Rs. 100. However, apart from reward earning, it’s equally important to understand how much each point is worth when redeemed.
For instance, IDFC FIRST Wealth Credit Card offers up to 10 reward points per Rs. 150 spent, whereas another premium card, HDFC Diners Club Black, offers 5 reward points per Rs. 150 spent.
From an earning perspective, it might seem like IDFC FIRST Wealth Credit Card offers better value-back. But, earning more points doesn’t necessarily mean better value-back if the redemption value is low.
While HDFC Diners Club Black has a relatively lower earning rate of 3.33%, it offers a high redemption value of up to Rs. 1 per point, keeping the overall reward rate at 3.33%. On the other hand, even though IDFC FIRST Wealth has a higher earning rate of up to 6.66%, the redemption value is only Rs. 0.25 per point, bringing down the overall reward rate to just 1.66%.
So, always evaluate both how much you earn and how much your rewards are worth when redeemed.
Which Redemption Option is Right for You?
While considering the reward redemption value is important, it is equally important to analyze which redemption option is best suitable for you. Credit cards allow you to redeem accumulated reward points across a variety of options, including cash credit, products and vouchers from the rewards catalogue, air miles conversion, and much more.
Below mentioned are some of the popular redemption options and who they are best suitable for.
Air Miles Conversion and Travel Bookings
Air Miles conversion is one of the popular reward redemption options that is best suited for frequent travellers. Most card issuers allow you to transfer accumulated reward points to partner airlines and hotel loyalty programs, allowing you to save on your travel expenses. For instance, with HDFC Diners Club Black Credit Card, you can convert the accumulated reward points into Air Miles at a value of 1 Air Mile per point.
However, one thing to note while opting for miles conversion is that you can only redeem the points against the partner airlines or hotels, which may limit your options. Therefore, you can only maximize this redemption option if you prefer the airlines or hotels partnered with your bank.
Apart from the miles conversion, some card issuers also allow you to redeem the accumulated reward points against travel bookings through their reward portals. For instance, with HDFC Diners Club Black Credit Card, you can redeem the accumulated reward points against hotels/flight bookings through the SmartBuy portal at a 1:1 ratio.
Shopping with Partnered Brands
With some co-branded cards, you can only redeem the accumulated reward points at the partner brands. For instance, with Tata Neu Infinity HDFC Credit Card, you can earn up to 10% reward points on select Tata Neu spends but you earn value-back in the form of NeuCoins which can be redeemed only on Tata Neu and its partner brands at a 1:1 ratio. Similarly, with MakeMyTrip ICICI Bank Credit Card, you can redeem the accumulated MyCash against travel bookings via MakeMyTrip.
While such credit cards can help you save significantly on your spends, it is important to analyze whether you will be able to maximize the benefits from a co-branded credit card. You should only opt for one if you are a loyal customer of the partnered brand.
Gift Vouchers and Products
Card issuers also allow you to redeem your accumulated reward points against gift vouchers and products through their rewards catalogue. Generally, the redemption value for this option is lower compared to other options, but it can still be a reasonable choice if you want to save on online shopping. Moreover, some credit cards also offer vouchers of some premium lifestyle brands like Giorgio Armani, Michael Kors, Coach, Superdry, Hugo Boss, Steve Madden, etc.
If you prefer to shop online from the brands listed in the rewards catalogue, this option can help you save significantly. Since the rewards catalogue usually has multiple brands, you can save across various categories, such as shopping, travel, and more. However, an important point to note is that in some cases, the reward redemption value may vary from item to item.
Cashback Redemption
Cashback is the most straightforward redemption option offered by credit cards. While cashback credit cards offer cashback directly in the form of statement credit, rewards credit cards allow you to redeem the accumulated reward points against statement credit. However, this redemption value is generally lower as compared to other options.
For example, with HDFC DC Black Credit Card, you can redeem the accumulated reward points against cashback at a value of 1 RP = Rs. 0.30. Whereas select cards like HDFC Millennia and YES Bank Paisabazaar PaisaSave allow you to redeem the accumulated reward points against cashback at a 1:1 ratio.
Hence, it is important to understand your redemption preferences before opting for cashback redemption, as only select cards offer decent value-back through cashback redemption.
Is Cashback the Best Redemption Option?
There’s no one-size-fits-all rule when it comes to reward redemption. The best option depends on your lifestyle and spending preferences. If you prefer straightforward value-back, cashback redemption can be a reasonable choice. However, do note that most of the reward credit cards do not offer 1:1 cashback redemption ratio, which can significantly impact your savings. Therefore, if you prefer direct value-back, you should opt for a cashback credit card.
How is Reward Rate Calculated?
To calculate the reward rate on a credit card, you must factor in reward earning and reward redemption.
- Reward earning refers to the number of reward points you earn on every spend
- Reward redemption determines the overall value you get when redeeming those points
Let’s understand this with an example.
Suppose you have HDFC Diners Club Black Credit Card, which offers 5 reward points for every Rs. 150 spent.
Reward Earning Rate = (Number of Reward Points/Spend Amount) × 100 = (5/150) × 100 = 3.33%
Overall Reward Rate Based on Redemption
a) If you convert points into Airmiles at 1 RP = Rs. 1:
Overall reward rate = Earning Rate × Redemption Value Per Point = 3.33 × 1 = 3.33%
b) If you redeem points against cashback at 1 RP = Rs. 0.30:
Overall reward rate = 3.33 × 0.30 = 1%
So, if you redeem your reward points against Air Miles, the overall reward rate is 3.33%. Whereas, if you choose to redeem the reward points for cash credit, the overall reward rate reduces to 1%.
Reward Redemption Fees
Another major thing to consider is the fees and charges associated with the reward redemption. Typically, card issuers charge a flat reward redemption fee every time you redeem your reward points. Though this amount may not be significant, it will impact the overall savings every time you redeem. For instance, HDFC Bank charges a reward redemption fee of Rs. 99 on redeeming reward points against Air Miles and products & vouchers.
Therefore, before redeeming the accumulated reward points, it is important to read about all the related terms and conditions carefully to make an informed decision.
