What is Credit Card “Breakage”?
Everyone wants to (or should want to) wring the most value out of their credit cards—the statement credits, the perks like lounge access, the protections like extended warranties or trip delay insurance, and, of course, the points. The credit card companies, of course, don’t want this. At least not all the time. They want enough people taking photos of themselves flying first class to convince people to sign up and spend money on their cards. But if everyone took full advantage of their cards’ benefits then the banks wouldn’t be able to offer them. So how is this system able to (mostly) function? A big part of it is breakage.
What is breakage?
I’m going to use the term a little loosely. The Incentive Marketing Association calls it the “outstanding liability of a reward, either in terms of points or dollars and cents.” Investopedia defines it “revenue gained by retailers through unredeemed gift cards or other prepaid services that are never claimed.” And Forbes refers to it as “revenue recognized from services that are paid for but not used.”
For me, though, it’s just unused benefits, or benefits that were redeemed at sub-optimal value.
What does it mean for rewards credit cards?
I think of four general kinds of credit card breakage.
Lost credits
Many credit cards, especially those carrying annual fees, now come with statement credits towards various purchases. Amex is becoming infamous for using this “coupon book” model.
I personally love the Amex Gold card. It charges a $350 annual fee, but it comes with $424 worth of credits and benefits: $120 in Uber Cash, $120 toward dining with specific merchants, $100 toward Resy restaurants, and $84 in credits at Dunkin.
Take advantage of each of these, and Amex is basically paying you to hold their card. But apart from the Resy credit (two $50 credits), these are divided up monthly—if you don’t spend it, you’ll lose it. Each month you don’t use your $10 Uber Cash or spend $7+ at Dunkin, you lose that benefit—that’s breakage. 💔
Suffer enough breakage and the card can move from being free-to-hold to a net expense on your balance sheet. 📉
Lost points
Generally, as long as you hold your credit card, your points wont expire. But you can still lose them. The main way is stranding them. Say you transfer points to Accor for a hotel stay that you end up needing to cancel. They will expire after 12 months if you don’t find a way to extend them, resulting in breakage. 💔 You can risk this situation by transferring points to a foreign program whose miles expire, like Avianca. If your plans fall through, you might not be able to plan another trip in the window before the points expire. 💔
A subtler way is when you need to transfer more points than you need for a redemption. For example, you may need 29,100 points for a flight, but need to transfer in increments of 1,000. If you are transferring to a program you don’t use often, you might lose the 900 spare points, either to expiration or simply because you never get another chance to use them. 💔
Lost benefits
You can lose benefits in a number of ways. One is by failing to get your membership benefits. If you have the IHG Premier you could enjoy the benefits of Platinum Elite status like bonus points and a welcome amenity at check-in. If you forget to add your IHG Rewards number to your reservation, that would be breakage. 💔 Or if you have the Capital One Venture X, your annual fee includes a ($469-value) Priority Pass membership. If you never use it? More breakage. 💔 Another type of breakage is failing to use your protections. If your card has trip delay insurance or purchase protection and you neglect to file a claim when you have a qualifying situation? 💔
Lost value
Finally, a major form of breakage is redeeming points for less than they’re worth. Now, I don’t think every redemption needs to be compared to some hypothetical optimal value, or even (unrealistic) estimates of what points are “worth.”
But if you can redeem a Bilt point for 1.25¢ towards travel on the Bilt portal, for example, and get 0.7¢ for it at Amazon instead, that’s some pretty major breakage. 💔
We strongly approve of lazy, simple, decent-value redemptions here, like erasing purchases with Capital One miles or or booking flights with Amex points via AmexTravel, even if this represents some breakage compared to the optimal use of transfer partners. 💔
How to minimize breakage
There’s a few tricks you can use to minimize breakage.
Choose your cards wisely
An ounce of prevention is worth a pound of cure. If you’re going to be depending on statement credits to earn back the money spent on an annual fee, make sure you will get full value from them and be able to earn them every time they come along, or at least often enough to get the value you need.
As much as I love the Amex Gold and its 4x points at restaurants, I can get 3x with my no-fee Bilt card and never have to worry about the Gold’s complex web of credits. Sometimes it pays to keep it simple.
Keep track of your credits
We’re veering into non-lazy territory here, but to make sure you use all your credits, consider setting up a system to make sure you use your credits. I have an excel sheet with a checkmark for each credit, with the important ones at the top. You could also set a calendar event at the end of each month/quarter/year to remind you to use them. Tools like AwardWallet and CardPointers can also help.
Learn the hacks
Some of these credits can be banked before they expire. You just need to know your card and play around. For example, if you have a card with Resy credits like the Delta Amex Platinum, you may be able to use the credit to buy gift cards at Resy restaurants until you accumulate enough for a proper meal. Some Amex flight credits can also be used for United TravelBank cash.
Avoid wasteful redemptions
You don’t need to study points professionally—just have a basic understanding of how to value redemptions and make sure you’re getting at least as much value as you can get the easy way. Or if you don’t want to mess around calculating values, just start with the easy way!
Don’t spend extra
Remember, if you go to a merchant and spend money just to earn a credit, you’re not avoiding breakage, you’re just losing money.
Conclusion
It’s impossible to get completely optimal value from your credit cards, but by being mindful of breakage you can choose a card that’s suited to your habits and avoid the pitfalls that can drive up the cost of your credit card and eat away from the value of your rewards.