Why cashbacks are a better option than reward points in credit card space

Unused reward points come with the risk of getting lapsed if you don't redeem them

Most shoppers will use their cards to avail of the deals and discounts on offer this festival season. Credit cards reward users either via cashback or rewards points. Users need to understand the pros and cons of these two modes of rewarding customers. 

In cashback offers, as the name suggests, you get some cash back every time you use your card. Says Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.com: “Cashback credit cards return a percentage of each card transaction back to the user. The cashback percentage varies across spend categories. For example, the Citi Cash Back Credit Card offers 5 per cent cashback on movie ticket purchases, telephone bills and utility bill payments, and 0.50 per cent on other spends.” Most banks stipulate a minimum transaction amount for you to qualify for benefits, and there is a cap on the cash they return.

The redemption process varies from one bank to another. Says Harjeet Toor, head, retail inclusion and rural business, credit cards, retail and MSME lending, RBL Bank: “If a promotion entails cashback, the same is credited to the card account.” Your bank will adjust the cashback amount against next month’s bill. Most banks give the benefit without you taking any action. With a few, you have to call the customer care or make a request via net banking, as in the case of HDFC Moneyback card. Cards may require you to accumulate a minimum threshold of cashback before they adjust it against your bill. In the case of Citi Cash Back Credit, the required amount is Rs 500. 

In the case of reward points, every time you use the card for a specific amount, you get a few points. For instance, for Rs 100-150 spent on the card, you usually get 1-5 points. Each point earned can be worth Rs 0.25-1. A minimum amount must be spent per transaction to earn reward points. Different categories of spends give you different points. For instance, with the SBI Signature Elite credit card, for every Rs 100 spent on dining, you get 10 reward points. On other purchases, you get two points. On reaching certain spending milestones, some banks offer extra reward points.

Credit cards allow redeeming reward points only against pre-specified vouchers, spend-types, air miles programmes, etc. “Some card issuers also allow adjusting accumulated reward points against outstanding bills,” says Kukreja. Most banks let you redeem via net banking. If you don’t redeem your points on time, they lapse. For instance, HDFC Bank Diner Club Rewardz reward points are valid for two years.  Comparing cashbacks with rewards points, Ashita Aggarwal, professor marketing and chairperson, PGMPW, SPJIMR, says: “When the customer is shopping during a festival season, say, Diwali, he wants short-term gain. For him cashback works better because he sees something coming back to him instantly. It adds to his disposable income and allows him to buy something more. In his mind, it’s almost like a cash discount.” 

Reward points work if you want the benefits of an enduring, loyalty-based relationship with the bank. Redeeming points requires some action on your part. Says Aggarwal: “With reward points, you put the onus on the customer to do something. Chances are very few customers would do it. There is a psychological and a time cost involved. A customer perceives value by total cost, both monetary and non-monetary. Whenever you ask her to redeem reward points, you increase her non-monetary cost.” 

Adds Kukreja: “Most card issuers charge redemption fees for redeeming the reward points and have expiry periods for them.”  Unless you are sure you will redeem your reward points, go for cashback this festive season.