Determining value of rewards redemption
Redeeming points for merchandise has an upside
By Randy Petersen | Published: April 16, 2009
Dear Cashing In,
My rewards credit card has an online site where I can exchange reward points for merchandise or gift cards. Is buying merchandise with your points a good deal?
When real "money" is more important in your pocket than any amount of miles or points, it just might be. The answer, however, depends on the nature of the rewards credit card you are referring to. Why is this important? Let's say you have a particular airline frequent flier reward credit card. The best "value" for you with this card will always be redemption for airline travel. The same thing is true if you had a hotel rewards card. The best value would always be for redemption at hotels. And, of course, the best value from other types of rewards credit cards will be when you redeem for product or services with the actual sponsor of the rewards card.
Here's the key to understanding this value function: Whenever any rewards program has to "buy" rewards outside their purpose of business, that cost is reflected in a lower value to the cardholder. For example, for most airline rewards credit cards, redeeming for air travel will often bring you value of 1.5 cents to 10 cents per mile being redeemed. However, when redeeming those same miles for an iPod, flat-screen TV or even gift cards, the value is often pegged at only 1 cent per mile and often less.
There are two situations when redeeming reward credit card miles and points for merchandise makes perfect sense, and frankly, I've used my own miles and points for these exact purposes:
1. When your personal financial situation makes it prudent to watch your pennies. Given the current economic uncertainties, I can easily recommend that cardholders use their points for things they might normally reach into their wallets to purchase. This time of the year, graduation gifts come to mind, as well as perhaps gasoline cards, home improvement cards and even the new set of golf clubs you've had your eye on. (In tough times, you don't want to give up hope for your golf game!) I think that these types of utilitarian redemptions can serve a good purpose. After all, while you may not be getting the absolute "best" value for your miles and points, you at least are adding value to your life.
2. When you simply have too many miles and points. Balances for many of the rewards cards have boomed with the never-ending addition of partners to earn reward currency from and the more recent incentives to earn even more with never-ending promotions. So, if you have hundreds of thousands of miles and points, then use those for merchandise. Besides, if you have that many, you're likely able to replace them soon enough anyway.
So your reasons for redemption are when your own personal situation demands it, with an understanding that you'd go crazy if you tried to value average every redemption. Me? I'm all for redeeming my miles for the big screen TV now that baseball season has started!
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