Thursday, January 1, 2009

Reward points or cash rebates

If you have visited this blog long enough, you will know that I am a credit card enthusiast. I am a fanatic of any credit cards that can give the highest return in cash rebates for all rounder type of spending. Recently I came across an article Play your cards right by Ignatius Low in Asiaone business section. You may read the whole article from the link. I tend to agree and disagree some of the points mentioned by the author.

It is certainly a good thing of the author to come out with the input and output equation thing. But I feel the author fail to address the relationship between the input and output. Usually in an investment, you always find the return of your investment in order to do a comparison. So similarly, you should do the same for credit cards. At what expense of inputs will you get the outputs which are the vouchers or cash rebates? Therefore you need to calculate the conversion rate to compare.

It is quite straight forward to calculate for cash rebate credit cards. With the best cards in the market, you can easily earn a maximum of 3.33% or 5% cash rebates using UOB One or SCB Manhattan credit cards. Now what is the conversion rate of a reward or point based credit card?

Take for example, the author mentioned about Citi Clear Platinum credit card. This credit card rewards card holder in terms of Citi Dollars. In case you do not know, 1 Citi Dollar is awarded for every $5 spent. I dig through the latest rewards catalogue from Citibank and let me show the conversion rate of a particular voucher. You can exchange for a $5 voucher from Popular Bookstore with 260 Citi Dollars. In order to obtain 260 Citi Dollars, which means you have to spend $1300 with this card. The conversion rate is simply 0.38% ($5 / $1300). But I know you can earn up to 5X rewards from a particular merchant as advertised by the banks. But that will only bring up the conversion rate to 1.92% (0.38% x 5). And how frequent do you go to the particular merchant to earn the Citi Dollars? Do you shop at Tangs or Popular Bookstore diligently in a month like you diligently need to pay for your bills?

You can calculate the conversion rate of the other vouchers for Citi Dollars and I can bet those rates will be more or less around 0.38% or 1.92% (for extra rewards). Let me show the conversion rate of another bank like OCBC.

For OCBC, the bank uses OCBC$ as rewards and you can earn 1 OCBC$ for every $1 charged to your OCBC credit card. The OCBC$ has about 1.5 years validity period and it is logical that if your expiry is shorter, the conversion tends to get better as bank wants you to spend more in the same period. Let us see a typical conversion rate for OCBC. Using the same example as Popular Bookstore, you can exchange for a $20 voucher with 4100 OCBC$. That means the conversion rate is at 0.49% slightly better than Citi Clear Platinum excluding the extra rewards.

Therefore you can see that the conversion rates are usually low compared to the percentage rebates given by some of the best all rounder cash rebates credit cards like UOB One and SCB Manhattan. All rounder means you can pay for any transactions including bills as long as the merchants accept credit cards.

There are some other reasons why rewards or points are not the right way to go. You may tend to spend more or extra while aiming for a particular point or reward. This habit can erode your conversion rate. The author do mention about Miles too. Obviously Miles are not suitable for the low spender as you may need to spend many years just to redeem your air flight ticket. I did not do a conversion rate exercise for Miles but logically even no matter how good the rate is, the effective rate will get diluted as you need to spend more in overseas if you don’t need the traveling. Unless you really need to travel, the Miles is not so useful in my opinion.

Despite the above criticisms, I do agree with the author mentioning that good cards usually expire after a year or two. For example, Citi Dividend used to be the best cash rebate credit card but who cares to use it now if you can enjoy UOB One or SCB Manhattan which have much relax requirements and reasonable conversion rates. In short, consumers always have to keep a look out for any possible replacement of the cards that I recommended.

5 comments:

verbatin said...

i only agree on one point raised by this Sunday Times reporter. he said that that good cards usually expire after a year or two which i tend to agree.

The most recent example is that of the HSBC revolution card. initially this card give out 2 free movie ticket every month (1st few hundred card holder that send sms). now they only give out 1 free ticket and u need to purchase for the 2nd ticket in order to get the 1st ticket free.

The write also mentioned that cards with traditional rewards points are better off than cash rebates which i definitely do not agee.

Like what Mike's concluded abt Citi miles rewards - "no matter how good the conversion rate is, the effective rate will get diluted as you need to spend more in overseas if you don’t need the traveling".

if u convert your rewards points to vouchers, some vouchers do not allow u to buy promotional items.
remember when u present the vouchers for purchases, u cannot use credit card to pay and u lose the "opportunity" to earn rewards from using your credit card. and vouchers comes with expiry too!

Cash (rebates) is king. u are free to do what u want with it.

my overall comment of this Sunday times article is that the writer has not done a thorough comparison!!

he fails to make a comparsion between his preferred citi miles card vs cash rebates credit card and his opinion is not convincing enough for someone like me:p

Mike Dirnt said...

thanks for the support verbatin. below are some good points raised:

"if u convert your rewards points to vouchers, some vouchers do not allow u to buy promotional items.
remember when u present the vouchers for purchases, u cannot use credit card to pay and u lose the "opportunity" to earn rewards from using your credit card. and vouchers comes with expiry too!"

yes and most importantly Cash is king!

Anonymous said...

Mike, some says card with miles may give better return. care to do some comparison on the 3 best cards on miles: Citi PremierMiles, DBS Altitude and UOB Signature.

i am referring to convert to mileages, not vouchers.

Mike Dirnt said...

1) you convert to air flight ticket. then you need to spend more in overseas. unless you really need to fly the ticket is not useful right? for example if you are a business man who frequently fly, then it makes sense to convert into air tickets

2) thought of selling the ticket? you are at the mercy of the demand side. what if nobody wants to buy or buyer requests discount on your ticket?

yes i do believe miles can give better returns, but the above points are some concerns that you need to consider

Anonymous said...

check this out:
http://online.wsj.com/article/SB126014168569179245.html