Credit card companies offer reward points - in the form of cash backs, discounts and reward points - to their customers with the sole purpose of motivating them to spend more. But if used wisely like Pranav in the example above, we can make this facility work to our advantage without resorting to overspending.
How reward points work?
When you use your credit card for any transaction, the card company gains an ‘interchange’ fee from the merchant outlet. It can differ from 1-2.5%. The outlet has a complete right to negotiate a lower fee if its volume is high. On the other hand, the credit card company also charges annual fees from the cardholder and interest earned on rolling overdue payments.
The company shares a part of earnings (mostly from interchange fee) with the cardholder in the form of reward points. The principal card holder can earn certain points on each transaction based on the amount involved, the type of card used and sometimes, the location of transaction.
Co-branded cards offer higher reward points than on most cards and are generally issued in partnership with petrol pump companies, large stores and airlines. The reward points on such cards can be 5-10 times the points earned on other cards. One can receive bonus points for using cards on special occasions. In fact, some premium cards provide bonus points at the time of enrolling for the card as well.
Redemption of credit card reward points should be in line with your spending patterns and priorities. Some common types of reward points are mentioned below:
- Frequent flyer rewards
- Cash back rewards
- Fuel point rewards
- Rewards against mobile phone usage
- Frequent shopper rewards
Those who travel a lot can opt for a frequent flyer reward programme. If you like road trips, then fuel point rewards are more useful for you. It’s also prudent to opt for a generic reward programme that grants points for payment of mobile bills, or mobile recharge in case of substantial mobile usage. Earning cash back rewards is easier this way because it’s not linked to how and where you spend your money.
Majority of cardholders use these points for claiming cash or gifts like kitchen appliances, cosmetics and utility items offered in the company catalogue. Once you know the number of points you have earned, you can easily select the option which seems most rewarding for you – either adjusted against purchases and fees or redeemed for cash or gifts.
Always consider the cost of annual fees charged by credit card companies in evaluating the benefit of reward points. No point enrolling for a card with a hefty annual fee just to avail of reward points which you may or may not use. Usually, entry level card is issued at minimum charges while premium cards involve expensive joining and annual fees. Always read and understand the fine print of these offers carefully to avoid needless surprises and shocks at the time of redemption. (A card offer is not like those predictable Bollywood movies where you can judge the story from the trailer or star cast). Make the card work for you, don’t get worked up by the card.