Seniors, Juniors and Sophomores

The credit card point skinny.

No matter how you slice it, your credit card points, for trade or for cash or for whatever, are worth a penny each. 10,000 points are worth $100. Most card companies when you cut through the obtuse language of the offer, give you one point for each dollar you purchase, 1% if you will- a penny on a dollar. Get it?

I have just completed an exhaustive study of several card point plans including American Express, Chase and Visa, and although the real value is buried in a camouflage of trading language, the points are still worth about $.01 each. I am not saying that is bad, just telling you to what the value is. Whether it is a trade for airline fares or a cruise to Aruba, 1% of what you spend is what they are worth.

Accounting regulations have driven the “point” marketing frenzy to equilibrium. Why? Because in order for the card companies to understand their “point” liabilities they need to have a definite value for the points, irrespective of how they package the offer to us the consumer. But here is the rub. If they accrue on their balance sheets 1% of all credit card charges for point trade-ins and only 50% of the people trade the points in, Walla, they have a pot full of profits they can take, to a certain extent, when they want. Meanwhile they pay no taxes on the accrued expense.

This blog may be a little confusing for my non-financial readers, but you can work your way through the money logic with a bit of effort. The credit card companies are not dumb. Further, they have hundreds of little financial elves engaged in this analysis. And guess what? They make money on your trade in selections. They are able to tell suppliers which items you prefer compared to other items and how you are successfully enticed to make your choice. Consumer behavior information is worth a fortune.

So what you say? Points are good. You are going to pay for them anyway in card charges. There still is no free lunch. The card companies are not going to gratuitously give you 1% back because they like you. Wake up Jack! They do not even know you.

So what you say, again? The point is you should not switch card companies because a seductive ad promises to cut you a special deal. Somewhere in the actual calculation the points are still worth about 1% of what you spend, no matter how you slice it.