Are rewards points worth it? The hidden costs of loyalty programs

We all know someone who is obsessed with points – those addictive little loyalty tools that airlines and credit card companies use to keep you spending.

Some people are so obsessed with them that they literally do a “Kath & Kim” and go on a massive spending spree so that they can get enough points to go on a holiday.

Obviously, that is a disastrous waste of money compared to just buying the tickets normally but it highlights the invidious way in which pursuing points becomes an end in itself and something of an obsession.

Points are not gold

In the most serious cases the points are not even used for anything but are stashed away like ingots of gold bullion in Fort Knox, even as their value diminishes rapidly.

The problem with being obsessed with points is abundantly clear at the moment with the value of points in various schemes being eroded, in many cases very significantly.

One interesting way to measure the cost effectiveness of points is to look at the amount of annual spending you need to do just to get enough points to offset rewards card fees.

A recent analysis by comparison website Mozo.com.au found that the annual spending needed to earn enough points to offset rewards card fees has surged strongly in the past decade.

Inflation makes it hard to pay card fees with points

That analysis showed that in 2014 almost half of the rewards credit cards on the Mozo database offered a positive rewards net value for an annual spend of $20,000.

Now that same yardstick shows that it is fewer than 1 in 10 cards that return any value above the card fee over a year.

Indeed, even if you double the spend to $40,000 a year, which is a serious amount of money to put through a card, only 36% of Mozo’s rewards card database deliver a positive return after fees.

Mozo spokesperson Rachel Wastell said the “significant devaluation” in rewards card offerings had come about due to regulatory changes around fees and lower profitability for the credit card market amid the rise of alternative payment schemes such as buy now pay later schemes.

When you mix that with fast inflating costs for card program such as frequent flyer points and travel insurance, the generosity of rewards programs simply had to drop a lot.

“It’s likely that most consumers don’t fully realise their reward card’s benefits have been devalued, unless they’re actively monitoring the market, said Ms Wastell.

Confusing rules make comparison difficult

She said changes happened over time and were often not communicated well to customers and reward programs were quite complex, making it hard to compare one set of points against another.

There are also a variety of conversion rates between credit card reward points and frequent flyer points, with some converting at one to one while others were significantly less generous such as one for three.

Personally, I find the pursuit of points all rather pointless (pun intended) when you think of all the mental gymnastics needed to understand each individual reward point system and the difficulty of being very strict you’re your spending so that you never spend more just to get points.

However, if you are a points buff and enjoy the thrill of the chase you will need to investigate which card produces the best result for the particular points you want to use and also the best way to employ those points.

For example, often seat upgrades are seen as better value than trying to buy an entire airfare – depending on the scheme involved.

Grab a card and spend, spend, spend – carefully

Otherwise, the formula is fairly easy to understand.

Once you have your favoured card, move as much of your spending as possible to it – ensuring you are not being hit with higher surcharges as a result – and then wait for the points to reach a useful level.

This can be quite quick if you have a small business and can direct a lot of necessary purchasing through the account but for the average person it is going to be a slow process.

Are there faster ways to make a profit?

If you stick to the original aim of trying to pay off the card fees before using the points for anything else, it is going to be quite a struggle – one that might be better avoided in favour of potentially much more lucrative and immediately profitable pursuits such as checking, comparing and switching your suppliers of electricity, gas, insurance and other regular bills to make sure you are getting the best deal.