Be wise when cashing in rewards points

Dear Cashing In,

I was trying to cash in some credit card rewards from my Wells Fargo account the other day. I noticed that if I chose a gift card that was affiliated with a specific company, the award was cheaper (5,000 points for a $50 Home Depot card, for example) than if I picked a Visa or MasterCard open-end gift card (5,500 points for a $50 Visa card). Why would the bank charge me more for that type of gift card than for a retail gift card? — Jim

Dear Jim,
You have a sharp eye! It’s cardholders like you who will reap the most out of rewards programs by understanding that awards’ values are variable.

To answer your question, you need to look at redeeming rewards with an eye on the retailer’s and the card issuer’s bottom lines. It’s relatively simple. The Home Depot gift card can be acquired from The Home Depot for a discount. Wells Fargo does not actually pay the full $50 to The Home Depot for the gift cards it provides to its customers.

The Home Depot knows that as a single destination gift card, it will likely be getting new money from anyone who redeems that gift card. In their research, they know that if you take that gift card to The Home Depot, the chances are you’ll spend more than just $50.

Plus, there is a significant amount of what is called “spoilage” or “breakage” from these types of gift cards — they are lost or the shopper just uses part of it and then forgets about it for years. Meanwhile, The Home Depot enjoys having that gift card money in the bank, earning interest, hoping that you’ll never use it. So, it’s a good business decision for The Home Depot to offer these gift cards as rewards to programs such as Wells Fargo at some sort of discount.

Now, let’s switch gears. A MasterCard or Visa really has no spoilage. Research shows that the member will actually use this general purpose gift card to its full value, and unlike The Home Depot, all Wells Fargo can hope to get is any part of the $50 value of the card that you don’t spend. The point being … you can never discount cash! Hence, the extra points it costs you to redeem a general purpose card.

That’s why in almost any rewards program — not just Wells Fargo — you’ll find these very subtle differences in redemption value. Be a wise member and look for these differences to increase the value of your points, your miles and your credits with any loyalty or other rewards program with which you are a member.

I hope this helps explain this difference, and again, congrats on being our “eagle-eye” rewards program redeemer of the day.

See related:  Do you lose your miles if you cancel your rewards card?, Canceled flight? Want your miles back? Good luck!, Multi-airlines cards versus single-airline cards, Comparing value of cash back cards versus rewards, Determining value of rewards redemption