Frequent readers of my blog know that I am an accountant (note: I don’t offer accounting or investing advice; please consult your own accountant and/or financial advisor). In the corporate accounting world, one of the hot topics is discussion of counterparty risk, which is basically the risk that the people you do business with will not be able to fulfill thier obligations. As companies across the country have been putting together their annual reports, this topic has received quite a bit of attention as our economy continues to deteriorate.
This idea of counterparty risk should be a concern to you as an individual as well. Why? Well, besides the worry about your bank deposits being at risk (which is a lot smaller issue than many think due to FDIC insurance coverage), you have to worry about the rewards points you’ve earned on your credit cards. Rewards programs have always had the risk of program changes and points devaluation, however now you have the risks of the bank that issued your card either ceasing to exist or being nationalized. If your bank ceases to exist and the account is assumed by another bank, it is almost certain that your rewards program will be converted to one offered by the assuming bank, which could be very different than what you currently have. A bank being nationalized is more of a wild card, as theoritically the bank will be under the same management, but with added pressure from the government to pursue policy objectives rather than profit objectives. It is anyone’s guess what that would mean for credit card rewards programs, but it is very possible high cost rewards programs could be scrapped to free up more funds for programs deemed to be in the “public interest”.
It is for this reason I have all but completely cashed out my rewards on my Citibank accounts. I had about $85 in rewards on my Citi Dividend card I withdrew last week, and I called today to cash out most of my Thank You points for a mortgage payment reward. That brought my Thank You point balance down from around 96,000 to about 2,000, which is a tolerable risk for me.
On a related note, you should also consider gift cards in the idea of counterparty risk as well. If the retailer you have a gift card for goes out of business (i.e., Circuit City, Linens-N-Things, Sharper Image), your gift card becomes worthless. That is the reason I used the Thank You points for the mortgage payment reward instead of for gift cards: of the retailers offering gift cards with a traditional 1 point=$0.01 redemption rate, none of them were stores I felt comfortable that I could spend the full amount in a reasonable period of time with my normal shopping habits (mostly department stores like Macy’s and Dillard’s). The stores I would actually use (Walmart, Target, Home Depot) only offered cards at the $50 level at a rate of 1 point=$0.00833, which isn’t that much better than the mortgage payment reward (1 point=$0.007987 at the $750 level), and considering the additional credit card rewards I would earn using my credit card instead of a gift card the two are nearly identical. Additional pluses for the mortgage payment reward are the elimination of counterparty risk (no chance of a retailer going out of business as I spend the balance of the gift cards) and fewer gift cards to keep up with.