Credit Card Rewards Devaluation: How To Avoid It?
Imagine opening a travel rewards credit card with the intention of using the points or miles gleaned over the course of the next year to pay for a family vacation, only to see excitement turn into disappointment when the number of points or miles required for redemption rises inexplicably, making the trip unattainable. Such an unfortunate scenario not only contributes to the fact that one-third of all the rewards points or miles issued by American companies each year go unused, according to a joint study from Colloquy and Swift Exchange, but also begs two important questions: 1) Why does this "rewards devaluation" occur and 2) How can it be avoided?
Rewards Devaluation Explained
Simply put, rewards devaluation is when the number of miles or points needed for certain rewards increases, thereby making already-earned points or miles less valuable. Rewards devaluation can occur whenever you earn rewards in terms of a virtual currency (e.g., Hilton Points, Citi ThankYou Points, Delta Miles, etc.), which means that it's relevant to all types of loyalty rewards programs, including those tied to airlines, hotels, retailers and credit cards. (For more, see: Do Customer Loyalty Programs Really Save You Money?).
How Big of a Problem is Rewards Devaluation?
At least $16 billion in rewards points or miles go unredeemed each year, according to the aforementioned titled "2011 Forecast of U.S. Consumer Loyalty Program Points Value." While there are certainly a myriad of factors at play here, rewards devaluation is certainly one of them. How big a role it plays varies based on the financial health of each company, with the tactic being leveraged more often during tough times in order to cut costs.Rewards devaluation also makes it extremely difficult for consumers to compare rewards programs. How does a rewards credit card offering three points for every $1 charged stack up against cards offering two miles per $1 and 1.5% cash back, respectively? Even if you are able to convert points or miles into cash, how are you supposed to factor in the possibility of the value of these points or miles changing overnight? You can therefore forget any quick and easy comparison of loyalty programs offering different rewards currencies.
Finally, there are no regulations that prevent or restrict a company's ability to devalue its rewards, which means it can happen at any time, for whatever reason and without a limit in terms of severity. Rewards devaluation therefore not only complicates rewards programs utilizing virtual currency, but also casts an aura of uncertainty over anyone earning points or miles. This is particularly true with credit cards, given that rewards redemption information is already one of the things that credit card companies disclose least clearly on their applications, according to a recent Card Hub study. (See: Reasons To Steer Clear Of Rewards Cards).
How Can Rewards Devaluation Be Avoided?
The easiest way to avoid rewards devaluation is to use cash-based rewards programs, given that cash cannot be made less valuable by a company. However, we all know that the most attractive rewards are often only available in terms of points or miles, and while there is no way to prevent devaluation when dealing with such currencies, you can mitigate its impact by redeeming as frequently as possible. Frequent redemption ensures that the fewest possible points or miles are at risk of devaluation at any given time.
Best Credit Cards with Devaluation in Mind
In light of the fact that cash back credit cards automatically eliminate the threat of devaluation, the best rewards credit cards for consumers and small business owners are the following:
- Capital One Cash Credit Card: Offers 1.5% cash back across all purchases as well as a $100 initial rewards bonus for spending $500 during the first three months.
- Capital One Spark Cash for Business: Provides 2% cash back across all purchases, a $100 initial rewards bonus for spending $1,000 in the first three months and $50 for adding employees as authorized users.
With these two cards, there is no earnings limit or expiration date, and both allow you to redeem cash rewards in any denomination, even automatically if you so choose. (See: Best Credit Cards For 2015)
The Bottom Line
At the end of the day, you aren't always going to be able to avoid earning rewards in terms of points or miles. While you will obviously be able to opt for cash back credit card rewards, when it comes to airlines, hotels or retail loyalty programs, this choice isn't likely to be available. Your best weapons in combating rewards devaluation in such situations are therefore awareness of the threat it poses, and frequent redemption in order to minimize its inherent risk.