How to Maximise Credit Card Rewards on Big Purchases

October 18, 2024

Credit card rewards can be incredibly useful for saving money on future purchases, especially when you’re making large transactions, like booking a hotel room. However, the dilemma of choosing between using your reward points or paying in cash can be tricky. You might wonder: should I redeem the reward points I’ve accumulated, or should I pay the full amount with my card and earn even more points to maximise credit card rewards?

This blog aims to help you make the most profitable decision by breaking down the scenario and offering a detailed analysis.

The Basics: How Credit Card Reward Points Work

Let’s first understand how reward points are structured on your credit card. In this example, the card provides the following rewards:

3.33% rewards on regular expenses.
For hotel bookings, the rewards are amplified, offering 10 times the points, which translates to an effective 33.3% rewards rate. This makes hotel bookings an ideal opportunity to maximize your reward points.

There’s one more rule in this case: you can only use reward points for up to 70% of the transaction value. The remaining 30% must be paid in cash (through your card), which allows you to earn more reward points on that cash portion.

One such card is a Metal card offered by HDFC Bank: INFINIA Credit Card Metal Edition In India.

The Scenario: A ₹10,000 Hotel Booking

Let’s say you have a hotel booking worth ₹10,000, and you have two options for making the payment:

Use ₹7,000 in reward points and pay the remaining ₹3,000 in cash.
Pay the entire ₹10,000 in cash, keeping your reward points for future use.

Option 1: Using ₹7,000 in Points and ₹3,000 in Cash

You can redeem ₹7,000 worth of reward points, earned from previous purchases.
You pay ₹3,000 in cash via your card.
For the ₹3,000 you spend in cash, you earn 33.3% reward points (since it’s a hotel booking), which gives you ₹999 worth of new points.

So, in this scenario:

You spend ₹7,000 in points and ₹3,000 in cash.
You earn ₹999 in new reward points.

Option 2: Paying the Full ₹10,000 in Cash

You pay the entire ₹10,000 in cash via your card.
Since hotel bookings earn 33.3% rewards, you earn ₹3,330 in new reward points for this transaction.

So, in this scenario:

You spend ₹10,000 in cash.
You earn ₹3,330 in new reward points.

Which Option is More Profitable?

At first glance, it might seem like using ₹7,000 in points to reduce your out-of-pocket cash expense (Option 1) is the better choice because it means less immediate cash spent. However, let’s break down the math to see which option actually gives you the best long-term benefit.

Option 1: Analysis

You are spending ₹7,000 worth of reward points earned from previous transactions. While this reduces your cash outlay, it also limits the number of new points you can earn because only ₹3,000 of the total transaction is paid in cash.
For the ₹3,000 cash spend, you earn ₹999 in new reward points (33.3% of ₹3,000).
Overall, you’ve spent ₹7,000 in points and earned ₹999 in new points, which means your net reduction in points is ₹6,001 (₹7,000 spent – ₹999 earned).

Option 2: Analysis

In this case, you pay the full ₹10,000 in cash and earn a significant ₹3,330 in new reward points (33.3% of ₹10,000).
This gives you a much higher future benefit in terms of points compared to Option 1.

Opportunity Cost of Cash vs. Reward Points

One key factor to consider is that the money spent out of pocket is your hard-earned, post-tax money. On the other hand, reward points are essentially “bonus” money you’ve earned from previous transactions. So, how do we compare these two?

To account for the difference in value between cash and points, we can apply a discount factor to reward points. This is because points, unlike cash, have limited flexibility—you can only redeem them under specific conditions (e.g., for hotel bookings, up to 70% of the total amount).

Let’s assume that reward points are worth 90% of cash, to reflect their reduced flexibility.

Option 1: Adjusting for the Discount Factor

In this scenario, you’re using ₹7,000 worth of points. With a 90% discount factor, these points are worth ₹6,300 in cash-equivalent terms.
You earn ₹999 worth of points, that with a discount factor of 90% would account to ₹899.
You also spend ₹3,000 in cash.
In total, you’ve spent ₹6,300 in cash-equivalent points and ₹3,000 in actual cash, and gained ₹899 in points, which gives a total effective spend of ₹8,401 in cash-equivalent terms.

Option 2: Adjusting for the Discount Factor

In this case, you spend ₹10,000 in cash and earn ₹3,330 in reward points.
With a 90% discount factor, the ₹3,330 points you earned are worth ₹2,997 in cash-equivalent terms.
So, your total effective spend is ₹10,000 – ₹2,997 = ₹7,003 in cash-equivalent terms.

Even after adjusting for the reduced flexibility of reward points, Option 2 still emerges as the more profitable choice because you earn a higher future benefit.

Avoiding Double Counting of Reward Points

Another common pitfall is the double counting of reward points—once when you earn them and again when you redeem them.

Here’s how to avoid this:

When you earn points, they represent a future benefit. You shouldn’t count their value until you actually redeem them.
When you redeem points, you’re consuming that benefit from the past. You’re not earning new value at this point.

Let’s reframe the analysis to avoid double counting:

Scenario 1:

You spend ₹7,000 in points and ₹3,000 in cash.
You earn ₹999 in new points from the ₹3,000 purchase.
The ₹7,000 in points was already earned from a previous transaction, so you should not count them as a new benefit now—they were already factored in when you earned them in the past.
The only new benefit in this scenario is the ₹999 in new points.

Scenario 2:

You spend ₹10,000 in cash and earn ₹3,330 in new points.
The new benefit in this scenario is the ₹3,330 in points earned.

Clarifying the Net Benefit:

Scenario 1:

Out-of-pocket spend: ₹3,000
New points earned: ₹999
Net benefit: ₹999 in new points earned.

Scenario 2:

Out-of-pocket spend: ₹10,000
New points earned: ₹3,330
Net benefit: ₹3,330 in new points earned.

As a Result:

In Scenario 1, the ₹7,000 in points is a sunk benefit from the past, and shouldn’t be considered as new. So, while it feels like you’re “spending” points again, they’ve already been earned and counted earlier. The only new value is what you earn on the current transaction, which in Scenario 2 is higher due to the full card spend.

Thus, Scenario 2 remains more profitable even after ensuring we’re not double counting points, because it provides a higher future benefit in the form of new points earned.

Final Thoughts

So, which option should you choose—paying in points or cash? Based on the analysis:

Reward points are a future benefit, and using them now means you’re forgoing potential future spending power.
Cash is harder to part with, but it opens the door to earning more reward points for future use.

In this case, even though it might feel easier to use your points and reduce the immediate cash outflow, paying the full amount in cash (Option 2) is the more profitable choice in the long run. You’ll earn a significantly larger number of reward points, which can be redeemed for more value on future purchases.

So, the next time you’re faced with this decision, remember: points are valuable, but earning more of them through cash payments can unlock even greater rewards down the line, and thus you can maximise your credit card reward points!

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