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Credit Card Cash Rebates Complicated to Calculate – Up to 8 times Variance in Costs for Rewards

  • 2018.12.17

Credit card companies offer a dazzling array of rewards, from flight mileage to special gifts, but which is the most beneficial choice?  To save trouble, many consumers simply opt for a cash rebate to directly offset credit card purchases.  In a survey carried out on 19 card issuers, providing 38 cash rebate plans, the Consumer Council found that the models for reward calculation were complicated and the required spending for cash rebates varied vastly – by up to 8 times.  The amount of the cash rebate earned often depended on a number of factors including: the reward offer, redemption conditions, limitations and the annual fee, making direct comparisons difficult for consumers.  The Council urges card issuers to clearly provide the calculation method when they launch their offers and the consumers should choose the card that best suits their individual consumption pattern, instead of blindly pursuing rewards through excessive spending which might far outweigh the benefits.

At first glance, cash rebates may seem simple. In general, the calculation models for the various reward schemes can be categorised into three main types, namely: direct rebate (18 plans), rebate through redemption (11), and reward deduction (10).  The calculation method for the direct rebate is relatively straightforward, whereas the other 2 types require the card holder to first convert the transaction amount into reward points, which are then converted into cash rebate. Computing the cost of the cash rebate makes it more complicated to make a direct comparison.  After stripping out various other benefits, the redemption rate for a $1 cash rebate can still vary by eightfold, ranging from a credit card purchase of between $50 to $450.   Consumers should take heed and compare reward schemes carefully.

Of the 18 direct rebate plans, the rebate was calculated at either a percentage of the transaction amount (11 plans), or a specific redemption ratio of the transaction amount (7 plans).  Take the example of a $1 cash rebate. Survey results showed that this rebate could equate to a non- designated spend or a local spend of $50 to $333.33, a variance of more than 5 times.

The ultimate cost of cash rebate also depended on the redemption procedure or conditions.  For instance, any amount of spending falling short of the sum required for a $1 cash rebate would not be carried over to the next month, so the actual redemption cost would often be slightly different from the marked redemption amount. Although the sum involved in each instance would probably only be a few dollars or cents at a time, this could add up to a considerable amount in the long run and should not be ignored. 

Card issuers would also promote a tempting range of rewards which offer different cash rebate redemption rates by reference to spending categories, regions of purchase, or types of shops.  For instance, cardholders who made purchases in a designated spending category would benefit by earning a cash rebate at a lower transaction amount.  Most plans award higher cash rebates for purchases overseas or in a foreign currency. Some card issuers divide the world into different regions with different rebate rates for different transaction amounts. Taiwan was found to have the most favourable rebate rate, with an average of $1 cash rebate for every $11 spent.

Cardholders are reminded that notwithstanding the apparent lure of being able to earn more rewards from overseas transactions, they should take into account not just the currency conversion rate, but also the handling charges of the card issuers and credit card companies.  Consumers should not just pay attention to the benefits of overseas transactions, while ignoring the other fees and charges involved.

Some card issuers offer extra reward points to cardholders who spend at designated shops, and some even offer cardholders the choice of their own preferred spending categories and reward multipliers. By choosing the specific types of credit cards with a higher rebate ratio judiciously, the transaction amount for a $1 cash rebate can drop considerably from $250 to $27.8. 

For the 11 plans which offered a redemption rebate, the transaction amount was automatically converted into reward points to enable cardholders to redeem for their choice of gifts or even a cash rebate.  The cash rebate would be credited to the next monthly statement, reducing the payment amount accordingly.  The plans varied in the allocation of reward points, from 1 to 2 reward points for every $1 non-designated or local spend.  To convert the reward points to a cash rebate, each cash rebate redemption was set at a specific unit of $20, $50 or $100 and the cardholders would then need to redeem with a number of reward points as required by the card issuers. Under this model, the amount of non-designated or local spend required for a $1 rebate varied from $100 to $450.

Consumers should note that the transaction amount required for the conversion varied according to the amount of the cash rebate selected.  For one of the credit cards, the exchange rate for a $1 cash rebate in the case of a $100 redemption was a transaction amount of $250.  But in the case of a $20 cash rebate redemption, the required transaction amount shot up to $450.

For the 10 plans that offered a reward deduction, cardholders could ask the shop to deduct the reward points or reward dollars from the bill amount directly, or specify the deduction via the online platform or mobile app upon completion of the transaction.  The average spend per dollar of discount ranged from $100 to $270, but at designated shops or in designated spending categories, the purchase amount was as low as $27.8 for each dollar of discount.

2 plans with reward deduction offered a choice to the cardholders to convert their reward points or reward dollars to Octopus Rewards. In one plan, cardholders were allowed to redeem $20 in Octopus Rewards equivalent to a total spend of $5,000 in purchases at shops participating in the Octopus Rewards programme.  In other words, a $1 Octopus Reward required $250 of spending, and the cardholder had to redeem at least $20 in Octopus Rewards each time.

In addition to the various rewards, consumers should also pay particular attention to the restrictions imposed in the cash rebate plans, the stated expiry period, and the annual fee. In the 13 plans with reward points, 6 plans (total 7 credit cards) set a maximum limit on reward points offered or accumulated. 2 cards set the monthly reward point offer limit at 2 and 3 times the credit limit respectively; and another 5 cards set a yearly accumulation limit on reward points obtained from insurance premiums and online bill payments at 12 times the credit limit.  As for the expiry period, 5 plans set an expiry period for reward points from 15 months to 3 years, while the rest remained permanently valid.  Most plans did not allow cash rebates or rewards to be earned for cash advances, annual fees or tax payments.  Most credit cards charged an annual fee of $220–$6,800.  In computing the actual cost of the cash rebate earned, these limitations and annual fees should all be taken into account.

Consumers should pay heed to the following with regard to credit card cash rebates:

- The benefits of cash rebate plans vary from plan to plan. Although the direct rebate model is simpler to calculate, the other 2 models are more flexible due to the wide variations in reward schemes.  Cardholders should take into account their usual consumption patterns, the frequency of credit card use and the usual types of purchases made to ensure that they choose the credit card and rewards scheme that best suit their needs;

- Cardholders should read the monthly statements carefully to check the cash rebate balance to ensure accuracy, paying attention to the expiry period, if any, of reward points, reward cash and cash rebate.  If cardholders plan to use reward points to earn a cash rebate but cannot accumulate enough reward points to convert to a cash rebate within the rebate period  and as a result miss the opportunity to redeem their accumulated points for other gifts, their rewards will be lost;

- Retain all transaction receipts and documents for ease of checking and follow up on the monthly statements and cash rebate balances to ensure that they are correct.  In case of error, the documentary proof will come in handy to enable them to pursue their case with the card issuer;

- Cardholders should remember to exercise prudent financial control and spend within their means.  Never apply for a credit card recklessly or spend more than they can afford just to earn extra rewards or obtain the welcome gifts.  

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