May 23, 2012

[Finances] Credit Card Mathematics


 I was recently studying various credit cards and their related features and benefits when I came to an annoying realization - just how little the credit card companies actually give us in terms of rebates and rewards. Allow me to explain.

When you sign up for a credit card, there are a few things that you're bound to use as your evaluation criteria:

  • The diversity of the credit card network
  • The finance charge
  • The annual fee
  • The rewards / perks of the card
And with more and more stores like Bench and Forever 21 launching their own credit cards through local banks, all the more it seems like a good idea to sign up for one of these cards in order to reap the benefits. But before you take that leap, you might want to consider doing the math.

At minimum you can use the following equation to determine just how much you're getting back from your credit card based:

(Peso Value of Reward) / [(# of Points Needed) x (Conversion Rate for Points)]

So how does this work?

Let's look at one of the basic BPI Credit Card benefits - those P500 gift certificates for various establishments for about 6,000 points each. when you apply the above formula you get this:

(P500) / [(6,000 points) x (P35 per point)] = 0.24%

So now you know that BPI more or less values you enough to give you less than a fourth of a percent of your spending back to you as a reward, provided you actually take the time to redeem your points. Doesn't seem like much, huh? They're a bit more generous when it comes to those Annual Fee credits in their rewards catalog - the return comes in above 0.5% this time around.

And remember, your first goal should be to find a way to get the value of your annual fee back before you redeem any other rewards (provided your card has that option). Thus for the BPI Mastercards (except for the Edge card), you typically need between P280,000 - P420,000 in annual spending to get your fee waived. Yikes!

How about the BDO Forever 21 card? Getting 3 points for every P200 your spend at Forever 21 (versus just 1 point for every P200 spent at other stores) sounds like a good deal, however also remember there's a P200 monthly fee, which translates to the equivalent to a P2,400 annual fee of sorts. So if you wanted to recover your annual fee based on the value of your "savings" at Forever 21, your rate of return seems pretty good at 1.5%, assuming you spend at least P160,000 at Forever 21 alone annually. If we look only at non-Forever 21 purchases, rate of return is down to 0.5%.

Still with me?

Gas cards are a bit more decent, assuming you do spend a lot of gas. Now there are no automatic ways of waiving your annual feels apart from demanding this from Customer Service every year, so let's figure out when the instant rebates become worth it. And by it I mean worth your annual fee. And the math for that is really easy:

Annual Fee / Rebate Rate

So let's look a the BPI-Petron Card, which has an annual fee of P1,550 and a rebate of 3%. Applying the formula we get:

P1,550 / 3% = P51,666.67

So as long as your annual gas expenses are well over P52,000, then the credit card starts to earn its keep, perhaps even more than most of the basic rewards programs above. I'm not sure what the limitations of the program are just now - it's not easily located on their website.

The Citibank Shell card offers a 5% rebate for both gas and toll expenses at SLEX and NLEX, so you just need to spend more than P36,000 to make it worth your while. However they have certain requirements - if you fail to spend less than P10,000 per month on non-fuel related items, you'll only get a 3% rebate. Plus you can't get more than P6,000 worth of rebates per year (which will be credited to your account in P1,000 increments).

And HSBC is probably the most generous since they offer the 3% rebate for Caltex fuel-ups across all of their credit card products, thus at minimum you need to spend more than P40,000 a year on gas (but not more than P20,000 in a month).

I could get into the whole Airline rewards discussion, although I'll admit the math is a lot more complicated and perhaps it may deserve its own article. On cursory evaluation though, the Mabuhay Miles program isn't quite as bad (with the HSBC tie-up) compared to the likes of the Delta SkyMiles tie-up BPI has since the international program has some pretty high redemption requirements.

In summary, a lot of the rewards programs are just there to make you feel good but won't really earn you a lot in savings. If you have a card, carefully consider a gas card and choose wisely based on your actual consumption habits. Although you have to remember that the rebate rewards tend to be available only at certain gas stations and not necessarily all stations in that company's network. And when you don't have a car, don't focus on the rewards as a basis for choosing a credit card. Stick to looking at the annual fees and the finance charges. Seriously.

What has your experience been with your credit card? Are their brands that you favor more because of their unique rewards? Have you changed your shopping habits in an effort to make the most of a particular card?

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