Tuesday, October 20, 2009

Calculating the Value of Rewards Points

If you have ever redeemed rewards points, you probably know getting your money's worth isn't always easy. Credit Card companies do this on purpose. They would much rather sell you a cheap knock off item that could be found at Sharper Image, or in a Sky Mall catalog, than give you straight cash.

Gift Certificates
Credit card companies receive advertising discounts for selling gift cards to stores and restaurants. This is why a $10 gift certificate at Burger Barn, costs fewer points than a $10 Visa Gift card. Burger Barn is basically paying the difference to guarantee your business. With a Visa Gift card $10 is $10 anywhere you spend it.

So which is better to get?
Ask yourself a few simple questions before reedeming store specific gift cards:
  • Do you regularly shop at this store on a weekly or monthly basis?
  • Would you make the same purchase if instead you could just have the cash?
  • Were you already planing to shop with this vendor?
  • Are you 100% positive the store didn't just catch your attention, and make you think of something to buy?

If you answered No to any of these questions; consider getting the Cash Reward or Visa Gift Card. The lure of impulse buying is too strong, and odds are you are trying to justify an irrational purchase.

If you answered Yes to all of the questions; you could be making a rational decision to take advantage of the additional store or restaurant specific discounts.

When To Redeem
You may be wondering when is the best time to cash in your growing reward point bounty.

  • Visa Gift Cards
    Most of the Rewards programs grow at a fairly linear pace in regards to Visa Gift Cards. This means there is no real difference between buying a $5 dollar gift card every time you hit the limit, versus saving all of your points for that $50 gift card.
  • Store and Restaurant Specific Gift Cards
    The larger store and restaurant specific gift cards tend to be a slightly better value, if you can rack-up a lot of points. However, it's extremely important to always check to make sure your points do not have an expiration date.

Actual Point Value
Now for the technical stuff! To Maximize your redemption spending, you must understand the value of your points.

  • Gift Card Validation- Gift cards are easy to validate just divide the dollar amount of the gift card by the total number of points it cost to purchase.

Example 1 : $25 Burger Barn Gift Card ÷ 11,000 points = $0.00227 Cents Per Point
Example 2 : $25 Visa Gift Card ÷ 15,000 points = $0.00166 Cents Per Point
Example 3 : $15 Cash Rewards ÷ 7,500 points = $0.00200 Cents Per Point

When comparing gift cards, you want the largest Cents Per Point. If you are a regular at the Burger Barn, and can answer yes to all the questions above, then Burger Barn is the best gift card for you. For the majority of us, the Cash Rewards is the best value because it makes the most cents per point, without influencing you to spend at an establishment that you wouldn't normally.

Buying Items, Vacations, or Airfare
If you insist on buying items like that toaster with a built in back scratcher, you need to evaluate whether its worth your points. This formula starts by using a known Cents Per Point from a Cash reward or Visa gift card, and multiplying it to the number of points for the desired item. If the toaster costs 20,000 points and you know that the same points are worth $0.00200 each, then the actual price your are paying for your toaster is $40. Now check to see if you can find it cheaper online.

Example 4 : Cost of Toaster 20,000 x the known CPP $0.002 = $40

Who Cares if its free money?
You should! Many of these cards have a annual charge that is almost equal to the average persons rewards earning. This means that you are essentially investing $25 to have the opportunity of redeeming $20-$30 worth of points. Even without an annual charge, the actual earning are microscopic compared to the spending it encourages. It is a way for credit card companies to make money. They wouldn't provide this service if they didn't. So be smart don't frivolously spend you points.

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