The game of credit cards 23rdNov'24

As someone who has always claimed himself to be financially prudent, it seemed a natural step to get sucked into the world of credit cards rewards. And honestly, I love playing this game. I love it every time a new piece of rectangular plastic gets delivered to my house. But my obsession has got me thinking about what sort of value credit cards add and who exactly benefits.

Firstly, it's not a game for everyone. Case in point, SBI cards data, where about 20-30% of receivables are revolving and 35-40% are converted into EMI. Average APR on revolving credit is ~40-50% and 18-24 % on EMI. About 60-70% of users are paying exorbitant interests on their spends, for them this is not a rewards game. It's a game of survival. (%Receivables ≠ % #Users, but for the sake of simplicity, let's assume that to be the case)

Coming to the users who are financially secure, credit cards are just a tool to save more. A fair share of these users will get a couple of credit cards and quietly enjoy their savings.

Then there are the cc geeks. They love cashbacks, they love rewards, and more than anything they love talking about their rewards (me included). Cashbacks on credit card spends are not enough, they want cashbacks even for paying their credit card bills. Essays and blogs are written on reward rates, how points paid for their entire vacation in Europe (I might do this myself one day), how they saved Rs 200 on a movie ticket etc.

There are broadly two types of card rewards - cashbacks and points. While cashbacks are relatively simple (though they are usually restricted to limited brands), let's focus on the points world. Because this is where people claim to derive crazy value.

In this glamour of savings, context is lost on two things - a) How did you spend to earn those rewards b) What is the opportunity cost of using these rewards?

The winners of this game are often people with expenses (usually business related) for which they are later reimbursed. In this case, the reward rates are not contingent on personal spending, its free money. But for everybody else, you need to spend enough to get something back. Obviously, it's stupid if people start spending more just to get a small percentage back as points. I am afraid this happens more often than not to the best of us, we get too involved in the game only to forget why we got into the game to begin with.

The interpretation of reward rates is also tricky - a high reward rate should immediately ring alarm bells. Take another example, if some card offers vouchers for free night stays at a luxury hotel, then people would quote the reward rate R1 = x/a where x is the price of free night stay and a is the money spent to acquire the voucher.

Then they would tell everyone how they saved so much money while on vacation because of this perk. But the question is would you have actually spent the same amount of money on the hotel if not for the voucher? If yes, great. If not, you probably would have spent y on a hotel where y << x. So, your true reward rate is y/a << x/a. You also have unlocked a more comfortable and luxurious experience, but it's not entirely fair to “credit” all this benefit as amount saved on vacation.

My biggest worry is when people who are relatively cash-strapped or not that financially disciplined get inspired by influencers (by throwing money at their online courses) to avail credit cards based on the promise of these rewards, only to be served a cruel reality check from their bankers. Spend wisely!