Photo: Osvaldo Zoom
When you think about it, credit card rewards points are kind of like middle-class crack. The card companies get us hooked with a huge initial dose and then charge us an insane premium when we come back for more. And the sad part is that we always come back for more.Many times, card issuers only allow you to redeem your points at certain checkpoints, and when you do, it’s not uncommon to find that you haven’t really earned enough to buy any of those cool prizes they advertise. And that’s not even the worst part. Here are four reasons why we sometimes hate the way credit card rewards points work.
1) The accumulation rates stink. That first 40,000-point “signing bonus” may seem impressive, but after that, your card’s rewards points will multiply more slowly than the guests at a Bank Appreciation Day event. At most, you’ll earn five points for every dollar you spend, but that’s only if you have a card that features one of those variable categories schemes and if you happen to be buying something from said categories. Otherwise, you’ll likely earn about one point for every dollar spent. So if you ever want to rack up another 40 grand in points, you’ll have to charge $40,000 to your card.
2) A point isn’t necessarily worth a dollar. Though a rewards point costs a dollar to earn, in some cases it’s worth less than a dollar when you try to spend it. For instance, Citi’s ThankYou Rewards program charges cardholders 28,500 points for a new 160 GB iPod Classic. That translates to $285. Walk into any Wal-Mart in the country and you can have that same iPod for only $229.
Citi isn’t even the worst offender. You know those 50,000 bonus points you earned from your new Chase Sapphire card? Yeah, those are only good for $625 in travel expenses. That puts the monetary value of a bonus point at about 1.2 cents. But hey, they’re free right? Well, not exactly, because…
3) Rewards make you spend more than you would otherwise. Though card companies don’t charge you for your bonus points, the opportunity cost of racking up rewards can’t be ignored. It’s not just that you have to spend with your card to earn points. It’s that you have to spend a lot, even to get those signing bonus points.
According to a recent Nilson report, people with standard cards spent an average of $465 a month. People with the same credit rating and a rewards card spent $890. Why? Because most schemes make cardholders spend between $1,000 and $2,000 within the first three months to get that large signing bonus. After that, point values depreciate so much that the consumer habitually overspends to earn more points.
4) There’s always a catch. Airline credit cards might not subject their points to expiration and blackout dates like they used to, but that doesn’t mean there isn’t a catch to earning rewards. If you have a cash rewards card, your card issuer will only cut you a check after you earn $25 in points, or sometimes only at the end of the year. If you use Citi’s ThankYou program, you can only redeem your points for one of Citi’s overpriced prizes. And if you want to choose your rewards with the American Express Zync card, you’ll have to pay up to $25 to add a categorical “package” to your scheme.
Credit card rewards work a lot like those carnival game ticket schemes you always fell for when you were little. You spend all day and all of your savings earning 10,000 tickets only to find out that a set of those cheap neon plastic vampire teeth costs 11,000. So while credit card rewards aren’t a bad thing – as long as you’re not one of those people who overspend to earn more points – you probably shouldn’t structure your life around them.