Own a credit card that earns reward points? BEWARE!

Points to watch out for when you swipe a credit card to earn reward points.

Open a wallet and you will see a slew of multi coloured credit cards peeping out from slots. Each one looking eager to be swiped. Credit card usage in India has been on the rise both online and offline be it big items like purchase of air tickets or small ones like paying for a coffee. According to RBI credit card spend has increased from Rs 57,958 crores in 2007-08 to Rs 96,613 crores in 2011-12.

Every bank offers a rewards programme on credit card. The rewards programme helps you earn back some part of your credit card spending. Most cards will offer one point for every hundred rupees spent.

Most loyalty programmes work by giving card members reward points for spending or paying bills on their card or even saving account transactions -- it is said that the card holders earn these points. These earned points can then be redeemed or 'burned' for travel, shopping, dining and entertainment.

For instance if you have a credit card which earns one reward point for Rs 150 spent, the earn rate is 1/150. Whereas each credit card reward point is worth Rs 0.20 only. So the burn rate is 20 paise. By multiplying the earn rate and the burn rate you get a common denominator to compare the rewards programme of the cards.

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

Illustration: Uttam Ghosh

Things to watch out for

Some credit cards offer bonus points programmes, allowing customers to earn double, triple or even 10 times the points for the same spend. Check if restrictions such as a limited period offer apply for all spend or limited to selected merchants and try to maximise your earnings.

Not all spends are included in the rewards programme. Typically, spending on fuel does not earn reward points.

For instance SBI charges a Rewards Redemption fee of Rs 99 plus GST which will be debited to the card account for each redemption request towards delivery and processing charges.

Typically rewards cards use their rewards to entice customers in. Many will see the potential rewards and pay little attention to anything else -- including the all important interest rate of the card. It is crucial to remember that any benefits gained from rewards cards are insignificant compared to the extra interest payable, if any.

Don't forget to check the lasting power of your points: All your hard work would go waste if your points expire. Select programmes offering non-expiry points allow customers to accumulate points from year to year.

Cash backs offers are usually more attractive than rewards as they offer an instant redemption. However, they usually come with an upper limit, for instance 5 per cent cash back subject to a maximum of Rs 500 per month.