Sunday, October 26, 2008

Credit Card Rewards: Redeeming for Goods is a Scam

When presented with two identical goods, any logical consumer should choose to purchase the lower priced option. But this obstacle is apparently overcome in the case of credit card point redemption.

For example, many credit cards (such as the one I have) offer points as rewards for purchases, and give the option of redeeming those points for cash or goods. The conversion rate for points to cash maxes out a 1/100, so 25,000 points can be redeemed for $250, and 50,000 points could be redeemed for $500.

But purchasing goods offers a much lower conversion rate. For example, a camera that on costs $160 in cash would cost the equivalent of $332 dollars (33,200 points) from the credit card company. A GPS that from Magellan costs $150 would cost in points $350 (35,000 points). By buying the goods with points, the consumer forgoes the cash and therefore pays an extra $172 dollars for the camera and an extra $200 for the GPS.

Obviously it would most benefit the consumer to redeem points for cash and buy the goods separately. (Additional benefit from this option is that the consumer would receive points for the additional purchase.)

So why do people redeem points goods? After all, the option wouldn't be available if no one used it. I think they are taking advantage of a psychological phenomenon whereby the consumer thinks (falsely) that they are getting something for free, and therefore become price insensitive. I would welcome your thoughts on this as well as further examples.

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