Gift card math, or, the economic stimulus problem in a nutshell

I have a credit card that gives a a point for every dollar I spend. These points are redeemable for assorted types of merchandise, other kinds or points, travel perks and gift cards.  I have another credit card that rewards me with useless flight miles.  Every now and again, I check the statements and see if I can reward myself with anything actually useful or interesting.

I figure the biggest bang for my point is to get a gift card - it's close to cash and if it's for a merchant I regularly use I probably won't waste it.  Redeeming points for actual goods seems silly since it's seldom anything I precisely want and usually at a lousy price.  So here are some prices for gift cards, they seem to be pretty much the same whatever the underlying merchant.  The percent is the ratio of gift card value to points.

Gift card value Points to buy Percent
$25 3,500 0.71%
$50 6,500 0.77%
$100 12,000 0.83%
$250 25,000 1.00%

So you can see that the larger card amounts make more sense, assuming you have the points.  I was 95% of the way to purchasing one when I noticed that "cash" was one of the options for redeeming your points.  Cash?  That's a great idea!  I can use cash to support local restaurants and merchants instead of megastores, or buy groceries or tip valet or purchase shady merchandise via craigslist.  I clicked through figuring there was no way the point conversion to cash would be as good as for gift cards - after all, the gift card has corporate backing and a high likelihood of non-redemption or of overflow spending over the value amount.  I was partly right...

Cash value Points to buy Percent
$25 5,000 0.50%
$80 10,000 0.80%
$160 20,000 0.80%
$250 25,000 1.00%
$500 50,000 1.00%

The deck is stacked against cash at the low end but if you've got 25,000 points, it's a wash with a gfit card. So I went for it.  A few days later, with no particular fanfare, an ACH credit appeared in my checking account.  I had turned useless points into actual money without a philosophers stone.

But here's the problem.  (take note, economists and would-be economic stimulators) That money is now commingled with my other money.  I'm no more likely (or less) to spend it than the money I had before.  If I had a gift card, I would have to spend it to get value.  Or if the "cash" had come on a preloaded debit card, I would have to spend it.  But this money was too liquid and it got absorbed into the pool before I could stimulate anything with it.

People are a bit too scared to spend extra cash if such a thing even exists.  To goose spending, the stimulators will have to find a form of payment that will get spent.  Gift cards seem unfair as they favor the large merchants so I lean towards prepaid debit cards which can be spent almost anywhere.  I would forsee shady deals whereby people could cash in their stimulus cards for a modest transaciton fee (see also tax refund loans and paycheck loans) but it seems impossible to eliminate all scams from the system.

I'm working on some ideas for how to spend some of this "found" money for maximum economic stimulus value or at least as locally as possible.  More on that in future posts, but I'm open to suggestions now.

4 Responses

  1. What a great find to turn points into cash! EVOO is having a special dinner tonight -- only $35... Local restaurant serving local ingredients? Doesn't get any better than that!
  2. Mmm. I <3 EVOO but made plans tonight to commit some of the big-box shopping sins for which I must later atone. I sure could go for some seasonal localvore goodness though.
  3. Professor N
    Hmm ... my card gives me 1% of my spending back, and that is directly redeemable as cash. I was thinking it wasn't a great deal, since some cards give 2-3% back for gas and shopping (then again, without a family or a long commute, it doesn't really matter), but after seeing your card, I think my deal is pretty good. That said, let me send you info about my card ... I've seen proposals that the stimulus should arrive as a debit card which you have to spend in 2 months otherwise it vanishes. The problem with that is that cash is fungible, and so you could use it for your regular expenses and keep your regular income as savings. Whether people would is a different matter.
  4. I think 1% back as cash or gifts cards is pretty standard now for rewards cards. Most also earn double or triple points on various kinds of stuff. It's the air miles card that's really worthless. Bottom line, I don't think we can make people spend if they have low confidence in the future, but I do think we can do a little better than sending checks or making tax cuts. Why buy now if you figure the store will go out of business and have a big sale next month?

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