Every time you use a credit card, there are free bonus points; do you use these?
Credit card reward points is an additional benefit for card holders. Smart usage of the reward points accumulated by converting these to specific benefits can ensure extra value being generated for the user. Here's some help on what strategies to adopt for smart usage of reward points-
Wastage: You need to adopt a strategy to tackle the accumulated reward points on your card because there are many instances when the card holder accumulates reward points but is not able to use those points. It is easy to accumulate reward points on your credit card as this happens automatically, on using the card for any kind of spend. Example: If a credit card offers 2 points for every Rs 100 spent, an expense of Rs 8,000 will result in accumulation of 160 points. Usually, spending on premium cards (gold, platinum, titanium or signature) or co-branded cards (ICICI Bank-HPCL, Jet Airways Citibank Platinum Card, SBI Railway Card) at specified outlets allows for a greater benefit in earning reward points for the cardholder.
After this, it takes some effort to redeem reward points and get the desired benefits. This often leads to a situation where a lot of reward points are accumulated on the card. Individuals with high spending capacity often accumulate 2,500 or 3,500 points without using those points. In some cases, points on the card may expire because some banks have a time limit within which the accumulated points have to be redeemed, usually two to three years. Another common situation is when an individual wants to submit his/her existing card. Then, if the points aren't used up, they lapse and will be eliminated by the bank. So, there are several reasons why cardholders need to pay attention to spending their reward points.
Direct conversion: An option for the credit cardholders is to have automatic conversion of accumulated points into a specified benefit. A common route for automatic conversion is by airline priviledge miles for frequent flyers. But, not all banks allow this facility with credit cards. It is usually the airline co-branded cards that give this facility as the first option. For instance, Jet Airways' co-branded card gives the option to convert the reward points into JPMiles (JetPrivilege Miles). This is also available for international airlines with a ‘Miles And More’ credit card. You can convert the reward points to airline miles that can then be redeemed at airlines like Lufthansa. Other cards might allow direct conversion to some other area such as vouchers for a specified store and so on.
An advantage of this kind of direct redemption is that there is little effort required by the cardholder. Not entirely so, as some effort has to be made when the end points such as airline miles are redeemed. This could also be a bigger barrier to redemption because unlike a credit card, it might take quite some time before the necessary limit is accumulated to enable redemption by buying, say, an air ticket. Another disadvantage could be that the choice is limited, as the miles are available only with a specific airline or vouchers of a specific store only, so the redemption might not suit the requirement of the cardholder at all times.
Specific redemption: This is the route followed by most credit cardholders and this involves choosing between the redemption options offered by the bank. This requires choosing the time period when the redemption is to be made, followed by exact items from the available list. This requires a bit of juggling between the available points and the figure demanded by the bank.
There are advantages and disadvantages in the use of specific redemption of reward points. The benefit is that it gives an element of choice for the individual because they might require different things at varying points. So, first they could redeem the points for a voucher at a fashion store when they want to purchase a perfume, followed by one for a shoe store and so forth. In most cases, there is a large choice available, as the areas of redemption cover apparel, entertainment, electronics, lifestyle, kids, home, watches, luxury, fashion, etc. If wide choice is absent for a card, it becomes a negative point. Another disadvantage is that the cardholder has to remember and complete the process of redemption, difficult for people with little time for such efforts. For those who love to plan, this can be very effective, as they can use the points to get the exact things they want.
The writer is a certified financial planner
