4 things cardholders should do to avoid credit card devaluation risk

If you have been following personal finance news, you might have come across reports that many credit cards have recently faced devaluation. So, what actually is credit card devaluation?

Primarily, credit card devaluation means a reduction in the benefits and perks available to the cardholder, even when spending levels remain the same. Devaluation, in simple parlance, means that the value proposition of a card is reduced by the card issuer.

Premium travel cards, co-branded airline and hotel cards and high-cashback programmes have all seen meaningful devaluations across the industry in recent years.

Cashback becomes capped: Banks can cap the maximum cashback a cardholder can earn in a month. For instance, it can restrict the cap at ₹2,000 per month instead of the earlier 5%.

Reduced benefits: Benefits such as access to airport lounge etc. may be restricted to only a few cardholders meeting some specified spending threshold, such as high quarterly spends etc.

Reward point dilution: Cardholders may need to redeem more reward points than before to avail of the same product or service.

Dr. Raj P Narayanam, Founder and Executive Chairman, Zaggle says, “Credit card devaluation is the gradual erosion of the value a cardholder receives from their card, not through any single dramatic change, but through a quiet, cumulative reduction in benefits that rarely makes headlines. Issuers reduce reward earn rates, cap monthly cashback, restrict lounge access, shrink redemption catalogues, inflate point-to-value ratios, or introduce new fees, often with 30 to 60 days' notice buried in a mailer most cardholders never read.”

The card in your wallet today may look identical to the one you applied for two years ago, but the value it delivers can be a fraction of what was originally promised, he adds.

The SBI Cashback Card now includes a total cashback limit of ₹4,000 per statement cycle. Additionally some of the categories, including bill payments, government transactions, no longer qualify for cashback eligibility. Earlier the rewards on the card were generous, with total cashbacks allowed up to ₹5,000 per statement cycle

HDFC Bank Infinia card: Now for even the membership or milestone benefits, the bank has updated the terms requiring minimum spends of ₹18 lakhs annually or a ₹50 lakh Total Relationship Value (TRV) with the bank.

Credit card issuers generally take such moves in a bid to reduce costs and improve profitability. In some cases, benefits may be restricted to high-spending customers rather than being offered universally.

As acquisition costs rise and interchange economics tighten, issuers recalibrate the cost of their reward programmes and cardholders absorb the difference, said Narayanam.

What should credit cardholders do?

According to Narayanam, credit cardholders can mitigate the risk of devaluation by taking the below steps:

First, audit your card annually. Calculate what you actually received in rewards, cashbacks and benefits over the past 12 months and compare it honestly against what you paid in annual fees, forex markups and finance charges. If the math no longer works, the card no longer works.

Second, redeem reward points regularly. Points sitting in a programme are exposed to devaluation risk, their value can be reduced at any time at the issuer's discretion. A point redeemed today is worth more than a point devalued tomorrow.

Third, read every communication from your card issuer, however routine it appears. Benefit changes are legally communicated, they are simply communicated quietly. The cardholder who reads the fine print is the one who makes informed decisions before the change takes effect, not after.

Fourth, never let loyalty to a card override the economics of the card. The best credit card is the one that delivers maximum value for your actual spending pattern, not the one with the most aspirational marketing or the heaviest metal.

Given the credit card market which is maturing, devaluation is inevitable. Accordingly, cardholders depending on the extent of the changes and what the card will offer post its devaluation can decide whether to continue holding the card or close it. Also, this review has to be a regular annual exercise.