Are you maximising value from your credit card? Here's when rewards justify the fee

Credit cards can offer cashback, reward points, airport lounge access, milestone benefits and other perks. But a card that looks rewarding on paper may not necessarily deliver the same value to you.

Reward caps, excluded spending categories, minimum-spend conditions and annual fees can reduce the actual benefit you receive. This is why simply looking at a card's advertised reward rate may not be enough.

So, how can you tell whether your credit card is worth keeping, and how can you maximise its value? If you have multiple cards, how do you decide which ones to retain, downgrade or close?

Don't look at the advertised reward rate alone

The reward rate advertised by a credit card issuer and the return you actually earn can be very different.

“The advertised reward rate and the effective reward rate are almost never the same number and the gap between the two is where most cardholders silently lose value,” says Dr Raj P Narayanam, Executive Chairman, Zaggle.

Cardholders should calculate a personal “transaction P&L” based on their actual spending and redemption behaviour, according to him.

The calculation should use the actual Rupee value you get when redeeming rewards, rather than the face value assigned to reward points. It should also include only those benefits that the cardholder genuinely uses.

On the cost side, factor in the annual fee, applicable taxes, and forex markup. Moreover, you need to consider the value forgone due to limitations like excluded spending categories for reward and cashback caps.

For example, if you spend ₹4 lakh a year and actually receive ₹8,000 worth of rewards and usable benefits, your effective return is 2%.

Narayanam says if the effective reward rate falls below 0.5%, the card may no longer be earning enough to justify its cost.

How should you calculate the actual value of a credit card?

A card's annual fee should not be compared with its advertised rewards in isolation. Instead, calculate how much value you actually received during the previous 12 months.

Ashish Lath, Founder & CEO, SaveSage, suggests looking at:

Annual value received = Rupee value of rewards earned + benefits actually used + milestone benefits – annual fee

The key is to value benefits realistically.

For example, if a credit card offers four complimentary airport lounge visits and assigns a value of ₹1,500 to each, you should not automatically count ₹6,000 as a benefit.

If you would normally use only one lounge visit, the value of the benefit to you should be based on that one visit.

Similarly, if a card offers a welcome voucher that you would not otherwise have purchased, assigning the entire headline value to it may overstate the benefit.

Cardholders should also factor in cashback caps and excluded categories because these can reduce the amount of spending that actually earns rewards, says Narayanam.

Illustration of ₹30,000–₹50,000 monthly spending: Is a ₹2,500–₹5,000 fee card worth it?

Consider a cardholder spending ₹30,000 a month, or ₹3.6 lakh a year. If a no-fee card earns 1% while a paid card earns 2% on eligible spending, the annual rewards would be ₹3,600 and ₹7,200, respectively.

But the paid card's real advantage is only ₹3,600—the extra rewards over the no-fee alternative.

So, a ₹2,500 annual fee can be recovered through additional rewards, while a ₹5,000 fee would require at least another ₹1,400 in benefits actually used to break even, before applicable taxes and other conditions.

The calculation changes when monthly spending rises to ₹50,000, or ₹6 lakh a year:

Annual spending	No-fee card earning at 1%	Paid card earning at 2%	Extra value from paid card
₹3.6 lakh	₹ 3,600	₹ 7,200	₹ 3,600
₹6 lakh	₹ 6,000	₹ 12,000	₹ 6,000

At ₹50,000 monthly spending, the paid card generates ₹6,000 more rewards than the no-fee alternative. A ₹5,000 annual fee could therefore be recovered through incremental rewards alone, assuming all spending qualifies and there are no reward caps or exclusions.

Don't compare a card's total rewards with its annual fee. Compare the extra value it gives you over the best alternative you already have.

Don't spend more just to unlock credit card rewards

Minimum-spend thresholds can tempt cardholders to increase their spending just to unlock a reward or milestone benefit.

Cardholders should optimise rewards around spending they were already planning, rather than changing their consumption just to earn rewards, says Lath.

Suppose you were already planning to spend ₹20,000. Routing that spending through a card to cross a milestone can make sense if the benefit is useful.

But if you planned to spend ₹15,000 and purchase an unnecessary ₹5,000 item just to cross a ₹20,000 threshold, the reward is no longer really saving you money.

There is another factor to consider: opportunity cost.

If Card A gives you a milestone reward for spending ₹20,000 but Card B would have earned substantially higher rewards on the same purchase, compare the additional value from Card A against what you could have earned elsewhere.

Have multiple credit cards? Give each card a purpose

Every card should either save money, earn meaningful rewards, provide benefits the customer genuinely uses or serve an important credit-history purpose, says Lath.

For example, one card could be used for travel, another for online purchases and another for everyday spending. A long-held no-fee card could have a different role in the portfolio.

The problem arises when multiple cards offer essentially the same benefits. If three cards all provide similar lounge access or similar rewards on online spending, paying annual fees on all three may not make economic sense.

Don't close an old card without checking its credit limit

Closing a credit card also removes its credit limit from your total available credit.

This can increase your overall credit-utilisation ratio even if your spending remains unchanged.

For example, suppose you have total credit limits of ₹10 lakh across your cards and normally have ₹1 lakh outstanding. Your utilisation is 10%.

If you close cards carrying ₹5 lakh of your total available limit, the same ₹1 lakh outstanding would represent 20% utilisation.

Credit utilisation is one of the factors that can affect a credit score, noted Lath.

This does not mean you should keep every unused card simply because it has a high limit. But if a card represents a large part of your total available credit, understand the possible impact before closing it.

Card age is another factor to consider before closing a card. Lath says consumers should be particularly careful with their oldest credit card because the age or depth of credit history is relevant to their credit profile.

Maximise value, not the number of rewards

The highest reward rate is not necessarily the best measure of a credit card's value.

The right approach is to calculate the net incremental value of each card: what it gives you, what you actually use, what it costs and what you could have earned from another card. A card is valuable not because it offers the highest rewards on paper, but because the benefits you actually use outweigh its costs.