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How to: Evaluate a credit card?

by A Trivedi & K V Sharma on
How to

The Bottom Line

Banks and credit card companies in India offer hundreds of credit cards. Each credit card offers a different set of rewards and has its own terms and conditions, which makes it difficult for most of us to figure out which card is best for us.

We cut through this complexity by ranking each card on its Net Reward Yield, which measures the total effective discount you receive in form of rewards, when you charge your expenses to the card.

To calculate the net reward yield of a credit card, we have created 5 standardized spending profiles of typical customers with different income levels. We simulate the total rewards a customer with each spending profile would get on a card, based on the reward schedule for that card.

Our reward calculations accounts for different types of rewards (cashback, points, miles etc.), reward caps by spending category, milestone bonuses, annual fees and differences in realizable value of the rewards depending on how you redeem them (e.g. on Bank website as statement credit vs. for flight bookings).

We prefer cards with higher rewards yields, lower income thresholds and lower fees.

We use this standardized method to calculate the net reward yield for every credit card we consider in India, allowing you to zoom in to the best credit card for you.


Understanding Credit Card Rewards

Many credit cards give you rewards when you use them to make payments. These rewards may be in the form of points in the card issuing bank’s reward program or as airline miles or as cash back to your account.

Often these cards offer a base reward for all spend and then also offer higher rewards for spending on specific categories or websites, for e.g. groceries or dining, Amazon or Flipkart etc. The rewards program for a card may also involve caps on the rewards earned each month, either for a specific category or in total.

If you use your credit cards for a lot of your spending, you can earn thousands in rewards over the course of a year just doing what you would have anyway done. This is a major argument in favor of using credit cards to make payments.

However, the value of these rewards is hard to estimate because the value of each reward point is often not clear. Also calculating the potential rewards can be hard for most people as they do not know in advance what their spending pattern will be and there are too many cards to compare.

As a result a lot of people end up choosing credit cards that give very low rewards and leave a lot of money on the table.

We solve this problem by creating standardized spending patterns to calculate the reward yield for each card and select cards with the highest rewards yield.

While your actual experience will certainly differ, this allows us to filter out the best cards offered by each bank. From our experience, in most cases the different spending pattern should not really change the answer for you materially.

By combining everything in one easy to understand metric, the rewards yield makes it a lot easier to choose the correct credit card.


Calculating the Reward Yield

Data We collect more than 50 data points for every credit card.

This includes basic information like the minimum income needed to be eligible for the card, the annual fees, the minimum spend needed for the annual fee waiver, the sign-up rewards etc.

We also collect information about the base rewards offered by each card and the enhanced rewards for different spending categories like Groceries, Travel, Dining etc.

These rewards are usually in the form of rewards points (e.g. HDFC Reward Points), cashback or airline miles (e.g. Intermiles or Indigo Points).

We also go through the terms and conditions for each credit card to identify other relevant restrictions or benefits available for each card.

Spending Profiles We have created 5 different credit card spending profiles, with different total monthly spends on the card (₹5K, ₹10K, ₹20K, ₹50K and ₹100K) and each with different mix of spending in categories like Dining, Transport etc.

Table 1: Spending Profiles For Estimating Rewards Yield

Total Monthly Spend in Rs.→
Spend by Category ↓
5,000 10,000 20,000 50,000 1 lac
Grocery 1,250 2,000 3,000 5,000 10,000
Dining 250 500 1,500 4,000 8,000
Food Delivery 250 500 1,000 2,250 3,000
Entertainment 250 500 1,000 1,250 2,000
Online Shopping 250 500 1,500 5,000 12,500
Shopping 250 750 1,500 5,000 10,000
Transport 250 500 1,000 3,750 7,500
Utility Bills 1,250 2,000 3,000 5,000 7,500
Online Entertainment 250 250 500 1,250 1,500
Travel 500 1,500 5,000 11,500
Foreign 500 1,500 5,000 11,500
Other 750 1,500 3,000 7,500 15,000
Total 5,000 10,000 20,000 50,000 1 lac

We use these profiles to calculate the total value of rewards you could collect in a month with these 5 spending patterns on each credit card.

For instance, HDFC MoneyBack+ Credit Card offers 2 CashPoints per ₹150 spent on the card as base reward. Spends on groceries earn 10x points i.e. 20 points per ₹150 spent.

HDFC MoneyBack+ Rewards
Rewards on HDFC MoneyBack+ Credit Card

So if you use the card to buy ₹1,000 worth of groceries, you earn 120 points (20 x 6 points for the first 6 blocks of ₹150 i.e. ₹900 and nothing for the last ₹100).

If you pay a ₹500 utility bill with the card, you earn 6 points (2 points each for the first 3 blocks of ₹150 and nothing for the last₹50).

The total reward earned per month is then adjusted for category and overall caps, minimum spending limits etc. The reward are also adjusted in case the rewards are restricted to a few specific merchants in a category rather than available for the entire category.

Table 2 : Rewards with ₹50,000 spend / mth on MoneyBack+

Categories Spending in Rs. Points Earned Note
Grocery 5,000 660 20 Pts / Rs. 150
Dining 4,000 52 2 Points / Rs.150
Food Delivery 2,250 300 20 Pts / Rs. 150
Entertainment 1,250 16 2 Points / Rs.150
Online Shopping 5,000 660 20 Pts / Rs. 150
Shopping 5,000 66 2 Points / Rs.150
Transport 3,750 50
Utility Bills 5,000 66
Online Entertainment 1,250 16
Travel 5,000 66
Foreign 5,000 66
Other 7,500 100
Total 50,000 2,118

Value of Rewards In case of cards offering reward points or airline miles, we convert the points or miles earned into a Rupee value so that we can fairly compare different cards.

For rewards points, the value you get often depends on how you redeem the points. For instance, the rewards points earned on the HDFC Regalia Credit Card are worth anywhere from ₹0.15 (redeemed as InterMiles) to ₹0.50 (redeemed via HDFC Bank’s SmartBuy platform).

For cards offering rewards in the form of Airline Rewards Points or Airmiles, we relied on our valuation of the Airmiles here.

Table 3 : Value of a Reward Point for HDFC Regalia Credit Card

Mode Value in Rs.
Flights and hotel bookings via Smartbuy 0.50
Airmiles conversion through Netbanking 0.15*
Products and Vouchers via Netbanking or SmartBuy 0.35
Cashback 0.20
* 1 Reward Point = 0.5 InterMile.

We usually prefer the redemption method with the highest value for our analysis. So for the Regalia card, we assume that you redeem rewards via the SmartBuy platfrom to buy flight tickets or for hotel bookings.

A bank may also have different value for its rewards points for different cards e.g. you earn Rewards Points on both HDFC Regalia and HDFC Platinum Edge Credit Cards. However one Reward Point on the Regalia is worth ₹0.20 for cashback, while on the Platinum Edge, one Reward Point is only worth ₹0.10.

In other words, just because you earn 4 points on two different cards for a spend, doesn’t mean you earn equal rewards.

Table 4: Effective Discount for Moneyback+ and Regalia Credit Cards

Cards→
Categories ↓
MoneyBack+ Credit Card Regalia Credit Card
Points** Value* Eff. Disc. % Points** Value^ Eff. Disc. %
Grocery 20 Rs.5.00 3.33% 4 Rs.1.40 0.93%
Food Delivery 20 Rs.5.00 3.33% 4 Rs.1.40 0.93%
Online Shopping 20 Rs.5.00 3.33% 4 Rs.1.40 0.93%
Other 2 Rs.0.50 0.33% 4 Rs.1.40 0.93%
* Value per Reward Point for MoneyBack+ = Rs. 0.25
^ Value per Reward Point for Regalia = Rs. 0.35
** For both cards, Rewards Points are awarded for every Rs. 150 spent.

Fees & Milestone Bonuses After estimating the rupee value of all the rewards earned on each credit card with each spending profile, we adjust the value for annual fees, fee waivers and milestone bonuses, if any. This card often have a significant impact on the actual value you receive.

Consider the case of Allahabad Bank SBI Card ELITE. We estimate a reward yield of about 2% on this card for someone charging about ₹3 lacs a year to the card. However the card also has and annual fee of ₹2,999, which can be waived on crossing ₹3 lacs in annual spend with the card. It also offers a milestone bonus of 10,000 reward points when you cross the ₹3 lacs mark in a year.

This means there is a big difference in the value you receive when you cross ₹3 lacs in a year vs. if you fall short of that amount by just ₹1. In this case, correctly adjusting for these two items can have a big impact on the card you choose.

Table 5: Impact of Annual Fees & Milestone Rewards

Calculation of Net Reward Yield – Allabad Bank SBI Card ELITE
Annual Spend ₹2,99,999 ₹3,00,000
Est. Gross Reward Yield 2.0% 2.0%
Gross Rewards Earned 6,000 6,000
– less Annual Fees (2,999) (2,999)
Annual Fee Waiver 2,999
Milestone Bonus 2,500
Net Rewards Earned 3,001 8,500
Net Rewards Yield 1.0% 2.8%

We select the cards with the highest net reward yield for each spend level and each bank. In case of similar yields, we prefer cards with lower annual fees and lower milestone bonuses.


Finding Best Card Combinations

People with higher spending levels can increase their rewards meaningfully by using more than one credit card strategically.

For example, if you spend ₹1 Lac a month on your card, the best single credit card from HDFC Bank (Millenia) will earn you about ₹1,750 in rewards each month, for a 1.75% reward yield.

However if you also take the HDFC Diners Club Black Credit Card and use it for your spending on Dining, In-store shopping, Travel bookings etc., while using the Millenia for the rest of your spend, you can earn nearly ₹2,300 each month, for a 2.3% reward yield. This is a 30% improvement.

To find the best card combinations, we consider 100’s of card pairs for each bank to figure out the combos that work best with each other to maximize rewards.

In testing a pair of cards, we assume that only one card will be used for each spending category and it would be the one with the higher rewards in that category.

For example, if you get HDFCs Millenia and Diners Club Black, you only use the Millenia for Groceries and only the Diners Club Black for Dining.

We think this is reasonable as you only need to know which card to use in which situation and don’t need to keep track of your spending on each card through the month.

Our recommended pairs maximize the rewards while increasing your probability of meeting the annual fee waiver spending limits and any other requirements for each card.

Table 5: Selecting Best Card Combinations: 1 lac+ spend / mth

Rewards Earned in Rs. Millennia Diners Club Black Combination
Grocery 300 165 300
Dining 80 212 212
Food Delivery 150 50 150
Entertainment 20 33 33
Online Shopping 300 208 300
Shopping 99 165 165
Transport 300 125 300
Utility Bills 75 125 125
Online Entertainment 75 25 75
Travel 114 190 190
Foreign 114 190 190
Other 150 250 250
Total* 1,940 1,862 2,580
Reward estimates based on spend profiles for Rs. 1 lacs / month.
* Total is different from the sum of all the categories due to annual fee and additional milestone rewards on meeting annual spending criteria.


What we did not consider

Many credit cards offer perks like airport lounge access, or discounts at specific merchants / restaurants. We did not include the value of these benefits in our calculations although some people may find them quite useful.

Some card offer complementary golf games or membership access to some clubs or services. We did not include the value of these in our analysis because not everyone may be able to use these benefits.

If any of these benefits on a card are very valuable to you, our calculations may not work for you.

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