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Credit Card Points… What’s the deal?

Credit card points and other reward programs are a big thing, people love these programs. I personally kind of hate them, only because they turn a simple product and decision into some big complex task just so you can get back some of the money being charged.

First what are credit card points and why do they even exist? Credit card points are a reward system built around a credit card product offered by a financial institution or sponsor organization. They are a means of rewarding customers for having and using a credit card. So why give a customer a reward beyond the product it self? Having a credit card is pretty useful on its own. Well… competition. Reward’s programs in general go back into the 1800’s. How do you make your generic credit card stand out? How do you get people to switch over and start using your card versus someone else? Credit Card points and rewards programs are one big piece of how companies do this.

When you make a purchase on your credit card there is an interchange fee charged. When you pay $100 to a merchant with a credit card, that merchant only gets about $97.50. The other $2.50 gets split between the financial institution and the credit card provider such as Visa or Mastercard. Why is the merchant okay with this arrangement? Well then they don’t have to worry about bounced checks, and customers are more likely to spend in larger quantities when they don’t have to worry about having the cash in hand to pay for something. The amount that goes to the financial institution is used to pay for the credit card program, along with any annual fees or interest they earn on balances not paid off by their customers.

Interchange fees can be a very large % of a program’s income for a financial institution. I won’t go into the math of it but interchange fees are one the primary reason why credit card’s are offered. But as with all juicy profit centers competition starts to eat into it. Credit Card points and rewards programs basically use part of this revenue created from interchange fee’s and pay it back out to the customer. Have you ever wondered why most cash back programs hover around 1%, its because of that 1 to 1.5% interchange fee the bank is getting. They certainly can’t pay out 5% cash back on everything with out having a major issue.

So as a customer how should you think about credit card points? You should think of it as profit sharing between you and the financial institution. They are sharing some of the revenue back with you to keep you around and help them earn more money.

For some people playing the credit card points and reward program game is just super fun. They love to sign up for new cards and get the bonus points, to charge extra things for friends and get paid back in cash so they can get extra points. They spend hours looking at different rewards programs and figuring out which is the best. If you have the time and energy for all of that, more power to you. I think the reward to people financially for playing those games is mild at best, if you work hard at it, you might be able to generate an extra $1000 or two a year of value, but the question becomes how many hours, headache and stress do you put into earning that extra rewards (never mind the fact that if you slip up, you may lose some of that reward based on a change in the program or not using it properly).

My philosophy on these programs is just to keep it simple. Find a program that rewards you in a way that you can and will use. If you like traveling then airline rewards, if you like coffee a Starbucks card, if you just want cash a cash back program. My only measurement would be to look to make sure you are earning something in the .75% to 1% in rewards (that you are actually going to use) from the program. I’d call that a victory, and not sweat trying to optimize for those extra few bucks. Spend your time on higher value things!

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