As an extra payoff for judicious use of credit cards, disciplined consumers may enjoy a bonus: Depending on the card program, paid bills accumulate points redeemable in rewards that range from electronics to stays at plush resort hotels.
Banks, credit card companies, credit unions and other financial institutions use reward points to spur spending and loyalty. Nearly three fourths of all cardholders participate in a rewards program, according to a 2008 survey of credit-card users by J.D. Power & Associates and First Annapolis Consulting. The survey also found that card holders who redeem points are happier customers. That’s why card issuers encourage you to redeem points. But when you do, be smart about it. Here are a few helpful hints.
Consumers often treat points as found money. It’s easy to see why, but it’s a mistake. You earned those points by spending money. So treat points like any financial asset—with an eye toward the best possible returns.
One way to make the most of your points is by approximating their cash value. As a benchmark, estimate the cash value that card issuers assign to their own gift cards. Say your card earns one point for every dollar you spend, and 20,000 points will purchase a $100 gift card that you can use in stores like cash. The gift card value represents a return on your spending of 0.5%. Looked at another way, the card company says that points toward gift cards are worth half a cent each.
Using this estimate of cash value, measure reward returns. Compare the cash value of the points against the cost of products or services if you bought them in a store or online. Before you spend your points on travel, gift cards or merchandise, consider the payback you can expect from the most popular rewards. Here are a few examples, based on the rewards offered by one major credit card issuer:
As you can clearly see, not all rewards are created equal. The message is clear: Always look before you redeem. Treat your rewards points like money and look for the best value.