Recently, I was amazed to learn that one of our team members financed 70% of his INR 15 lakh honeymoon to Australia (business class tickets, 5-star hotels, etc.) solely through credit card reward points.
His meticulously crafted spreadsheet, filled with air miles calculations and hotel point projections, revealed a world of ‘points-hacking’.
This isn’t just his passion – thousands in India are leveraging similar strategies to fund travel, shopping, and more.
This conversation inspired me to delve deeper into the transformation of credit cards from mere payment instruments to lifestyle enablers. It’s a fascinating shift that reflects a growing sophistication in how people approach personal finance.
Today, I will guide you through the intricate world of credit cards, uncovering the deeper insights and opportunities they offer. I will cover:
- The economics of credit cards – how credit card companies make money
- Following the money – The flow of funds and the cost of convenience
- The anatomy of rewards – Decoding the point system
- The booming credit card landscape in India and growth drivers
But first, let me take you through the origin of the first ‘bank card’.
The birth of credit cards: A massive gamble that paid off
Did you know the credit card as we know it today was born out of a bold experiment in 1958 when Bank of America (BoA) launched the first-ever pre-activated credit card in Fresno, California?
According to Britannica, the BoA mailed unsolicited BankAmericards (the first ever pre-activated credit cards) with a USD 300 limit to 65,000 customers. This risky “drop” method led to initial chaos:
- Delinquency rates soared to 22%.
- Fraud spiked as criminals intercepted cards from mailboxes.
- Outraged customers found themselves liable for charges on cards they never asked for.
Despite a USD 20 million loss and the resignation of program creator Joseph P. Williams, BoA persevered. They tightened financial controls, improved fraud detection, and launched a PR campaign to restore trust. By 1961, BankAmericard turned a profit, sparking a financial revolution.
Despite these initial setbacks, BankAmericard’s eventual success laid the foundation for the modern credit card industry. Today, credit cards are an integral part of the global financial ecosystem, facilitating billions of transactions daily.
However, the convenience of credit cards comes with a complex network of financial touch-points between various entities. To truly understand the credit card ecosystem, it’s crucial to follow the trail of money.
Following the money: The flow of funds and the cost of convenience
Every time you tap or swipe a credit card, a seemingly straightforward action sets off a complex financial process involving several key players:
This system keeps the flow of rewards and transaction processing running smoothly behind the scenes.
The surprising economics of credit cards: How card companies make money
Credit card companies primarily generate revenue via 3 sources:
- Interest fees – levied on your credit balance at a fixed rate (varies between card issuers)
- Merchant fees – paid when you make a credit card transaction
- Late fees – added to your credit balance if your payment is delayed past the due date
Did you know that customers who carry a balance and pay interest – known as “revolvers” – are often more profitable for credit card companies than those who pay off their balance each month (“transactors”)? Revolvers rack up interest and fees, which make them key contributors to credit card profits.
While credit cards offer convenience and rewards, they also come with costs that aren’t always obvious:
By being aware of these costs and utilising the benefits effectively, you can maximise the value of your credit cards.
The anatomy of rewards: Decoding the point system
Credit card rewards are a key attraction for many users, and most of us carry multiple credit cards for various purposes like travel, shopping or fuel, with each card offering different rewards and perks. But the system is more complex than it appears at first glance.
Let’s dive into the intricacies of the point economy:
Reward points: More than what meets the eye
- Earn rates – Not all spending is rewarded equally:
- Standard cards: 0.5-1 point per INR 100 spent
- Premium cards: 2-5 points per INR 100 spent
- Co-branded cards: Up to 10 points per INR 100 on partner spending
For example, a premium travel card might offer 5 points per INR 100 on flight bookings but only 1 point per INR 100 on grocery purchases.
- Valuation variances – The value of a point can vary significantly depending on how you redeem it:
- Travel points: Often valued highest, at 1-2 paise per point
- Cashback: Typically INR 0.5-1 per point
- Merchandise: Usually the lowest value, often below INR 0.5 per point
For instance, 10,000 points might be worth INR 200 as cashback, but could get you a INR 500 flight discount when redeemed for travel.
Maximisation strategies: Turning points into profits
- Category optimisation: Use different cards for different spending categories. For example, use a dining rewards card for restaurants and a travel card for flight bookings.
- Transfer partners: Some cards allow you to transfer points to airline or hotel loyalty programs. The transfer ratios for Amex points vary depending on the programme you’re transferring to. While many offer a 1:1 ratio, some can go as high as 1:2, meaning one Amex point could convert into two hotel or airline points.
- Signup bonuses: These can offer tremendous value as some issuers provide bonus rewards for paying the joining fee within a set timeframe. For instance, the ICICI Sapphiro card comes with welcome vouchers worth over INR 9,000 within 45 days of settling the joining fee.
- Pooling points: Some issuers allow you to combine points from multiple cards, helping you reach redemption thresholds faster. Some of the most popular ones are American Express Membership Rewards, Chase Ultimate Rewards and Citi ThankYou Rewards.
By understanding these nuances, you can extract maximum value from your credit card usage.
Staying ahead: Credit card experts and communities
In the ever-evolving world of credit cards, staying informed can make a significant difference in how you maximise your benefits. Let’s explore some valuable resources that can help you stay on top of the latest trends, hacks, and strategies.
Twitter: Your gateway to credit card wisdom
Twitter has become a hub for credit card enthusiasts and experts who share their insights, tips, and the latest offers. Here are some profiles that have popped up in conversations with a few team members who are credit card enthusiasts.
- @brownpoints: A go-to source for credit card news and analysis.
- @pointsdojo: Offers strategies for maximising your points and miles.
- @credit_cruze: Provides insights on credit card offers and rewards programs.
- @perfi_x: Shares personal finance tips with a focus on credit cards.
- @creditcardz_in: Keeps you updated on the latest credit card offers in India.
Thousands of accounts like these are providing a wealth of knowledge, from new card launches to strategies for maximising your rewards.
Discord: Powerful communities like Points Dojo
Points Dojo, a thriving Discord community has become a haven for credit card enthusiasts in India.
With over 3,000 members, Points Dojo is where credit card aficionados gather to discuss credit card hacks, points trading, reward maximisation and latest offers.
While these are two popular platforms that have come up in conversations, there are many more sources of information and strategies.
Remember, while these resources can provide valuable information, always approach credit card usage responsibly. The goal isn’t just to maximise rewards but to do so in a way that aligns with your financial goals and doesn’t lead to overspending or debt.
In summary
I’ve watched India’s credit card landscape evolve with keen interest. The growth in spending is impressive, but it’s the qualitative shifts that truly captivate me. Take the integration of credit cards with UPI, for example – it’s not just about convenience; it’s potentially reshaping how India approaches credit. This fusion of traditional credit tools and digital payments is a game-changer, offering exciting opportunities but also presenting new challenges we need to address.
My advice? Think of credit cards as powerful financial instruments, not just plastic in your wallet. Take the time to understand the ecosystem – from how banks turn a profit to the mechanics behind those enticing rewards. Remember, the credit card users who come out on top aren’t chasing every shiny reward. They’re the ones who thoughtfully align their card usage with their broader financial aspirations. As this industry continues to evolve at breakneck speed, staying informed and adaptable will be your best strategy for navigating this space.