Editorial Policy

Crunch the Numbers Before Cashing in Rewards

Eva Norlyk Smith Ph.D.

October 3, 2012

Credit card issuers are making it easier to redeem your rewards points, adding more redemption options, including the ability to make purchases on the spot.

But watch out — easier rewards redemption can sometimes mask a longer standing problem: The  value of different redemption options differ greatly, so you still need to do some number crunching to make sure you’re getting the most value out of your points.

Easier rewards
The trend toward easier redemption has been building for a while. Consumers leave as much as one-third of their rewards earnings on the table, according to a 2011 study by marketing firms Colloquy and Swift Exchange. One reason for these wasted points is that consumers spread themselves too thin and enroll in too many rewards programs to keep track. Another is simply time: The more difficult it is to redeem those rewards, the less likely people are to do it.

But less redemption means less consumer engagement, which, from a card issuers’ point of view, is the whole point of creating the rewards programs. So increasingly, card issuers are taking steps to address the issue and finding new ways to make rewards redemption as easy as 1-2-3.

Capital One, for example, recently launched its free Purchase Eraser app, which enables cardholders to redeem rewards earnings with a few taps on their mobile phones. Cardholders simply charge a travel purchase to their Capital One rewards card and then use the Purchase Eraser to wipe out the purchase cost by swapping rewards earnings for a statement credit. It’s a 20-second transaction that can be done online via your computer or your smart phone.

“The big change with the Purchase Eraser app is that it makes rewards redemption available on mobile devices as well, so customers can redeem anywhere, anytime,” says Amy Lenander, vice president of Rewards Programs at Capital One. “We’re focusing on taking the No Hassle rewards program to the next level, and this is one way to make it really easy for customers to access the rewards they have earned.”

Rewards redemption is getting easier on other cards, too. Chase and American Express cardholders, for example, can use rewards to shop on Amazon.com. Discover cardholders can also redeem cash-back earnings directly at Amazon and with Discover’s “Pay with Cashback Bonus Partners,” including Facebook and iTunes. As online shopping becomes increasingly common, the options for using rewards card earnings to pay for online purchases are only set to increase.

Sacrificing value for convenience?
There is a catch, however, and it’s a big one. The value of rewards redemption varies greatly according to how points are redeemed. And, sometimes, the least time-consuming methods of redemption yield the worst redemption values.

The Capital One Venture card, for example, rewards card users with 2 points per dollar spent. Use those rewards earnings as a statement credit towards specific travel purchases, and the value of those 2 points is a generous 2 cents per dollar. However, use those points for a generic statement credit (a less time-consuming redemption process), and rewards earnings are worth a more standard 1 cent per dollar.

Similarly, the value of Citi ThankYou points, if redeemed for a free flight, is 1 cent per dollar spent. However, redeem those same points for different kinds of cash-back rewards, and their value varies greatly: A simple cash redemption gives you only 0.5 cent value per dollar spent, while you get a full 1 cent if points are used for a student loan rebate or mortgage payment.

In other cases, better rewards value is gained by putting in the extra effort to redeem with the card issuer’s partner vendors. For example, $40 in Discover cash-back earnings can be redeemed for $50 gift cards with partner vendors, such as Land’s End, Lowe’s, Kohl’s and Macy’s, increasing the cash-back earnings by 25%, or from 1 cent per dollar spent to 1.25 cents per dollar spent.

Unfortunately, getting to the bottom of the actual value of different rewards options can be tricky. While card issuers are quick to highlight the main benefits of rewards programs, the limitations of those rewards tend to remain obscure, and in many cases, cannot be accessed until you become a member of the program.

In short, if you want to make sure you get the most value for your money, rewards redemption still can involve a lot of legwork. So, if card issuers are trying to make it easier to redeem rewards, why do rewards cards still offer so many different levels of redemption value? According to Lenander, rewards cards often specialize in certain rewards categories, and only provide the best value in that category. For this reason, it’s important to look before you leap.

“It’s important that consumers pick the card that’s right for them and understand what the most important parts are,” Lenander says. “The intention of the Venture card, for example, was to offer a great travel rewards card. The other redemption options are just there to give more flexibility.”

If the thought of poring through rewards cards details to find the best value isn’t your idea of fun, stick to the old tried-and-true option: Cash-back credit cards. While it’s often tricky to find the true rewards value with cards that count rewards in points or miles, cash-back percentages are harder to fudge. And with some cash-back credit cards offering rewards as high as 6 cents per dollar spent, if you’re looking for plain and simple, this might just be your flavor of vanilla.