By Julie Jaggernath
Canadians are in love with their reward credit cards. Whether we collect travel or merchandise points or simply cash back, loyalty programs through retail credit cards and/or co-branded credit cards contribute to staggering amounts of annual consumer spending.
When credit cards first came out with points that rewarded you for using your credit card, many people saw it as the ultimate way to get free stuff—just put everything you buy on your credit card and get free flights and merchandise for buying the things that you would normally buy anyway. It sounded almost too good to be true....and for some it is. The problems arise when you start using the points to justify your spending.
Here’s how to tell if using reward or loyalty credit cards is worth it for you:
The 4 Circumstances That Make Using Rewards Cards Worth It
In specific situations reward credit cards can be worth it. While studies have shown that people who pay with plastic spend anywhere between about 15% and 23% more for their purchases, if you know your prices, stick to your budget, don’t carry a balance on your credit cards, and understand how your points programs work, using cards that earn points could be worth it for you.
1. Pay Your Card Off in Full Every Month or You’ll End Up Paying for Someone Else’s Trip
Over 60% of Canadians routinely carry a balance on their credit cards. This means that by the time interest and fees are tacked on you’ve likely spent as much as 50% more for everything you’ve bought. When it comes to earning points, they’re usually only worth it if you’re not spending extra to earn them. If you are, then it’s probably cheaper just to buy your own reward, preferably with cash.
When you pay a lot of interest and/or fees on your credit cards, you help pay for someone else’s trip. The money to pay for rewards comes from interest and fees paid by consumers, as well as charges paid by merchants (merchants pay fees to be able to accept credit cards as a method of payment in their stores). Save your money and pay for your own trips by paying off your credit card debt.
2. Stick to Your Budget or You Could Lose All of Your Points
Having a budget is a great first step; sticking to it is the essential second step to make reward credit cards work for you. The trick is to only use the card to pay for items you were going to buy anyways, items already included in your spending plan.
The downside is ending up in financial trouble and having to forfeit your points. A credit card is not free money, nor is it an extension of your pay cheque. It is money lent to you, typically at a high rate of interest, which you must repay. A card must be in good standing, with all required payments up to day, in order for any points to be redeemed.
Statistically, we all typically spend 15% to 23% more for our purchases when we use credit cards. This means most of us pay for our points whether we like it or not. However, there is one way to avoid this: only charge fixed expenses on your credit card. Fixed expenses are things you have to buy every month, and the cost is always the same. Gasoline, transit fares, insurance, cable, internet, telephone, Netflix, tuition, subscriptions, or a set cell phone plan (that you never exceed) can all be fixed expenses.
If you have fix expenses that you're not going to be tempted to spend more on, you could pay for these with a rewards credit card, pay off your card balance every month, and pay for the rest of your variable expenses (groceries, eating out, entertainment, clothes, hobbies, etc.) with cash. This is one way you can ensure that credit card rewards are truly working for you and you're not paying extra for them.
3. Use a Credit Card with a Low/No Annual Fee to Get the Most Out of Your Points
Cards that earn points quickly for above-average spenders often come with high annual fees but to get the most out of your points, it’s best to use a card with a low/no annual fee. This is where many people fall down; either they don’t spend enough on their credit cards to earn enough points to make collecting them worthwhile, or worse, they spend more than they can afford just to earn points.
The catch is that if you are an average spender you need to use a card with a low/no annual fee to reap maximum rewards. If your card has a higher annual fee you need to earn enough points to offset that fee before the points become worthwhile for you to redeem.
4. Understand How the Loyalty Programs Work & What the Limitations Are – Types of Reward Credit Cards in Canada
There are many different types of reward credit cards. Travel and merchandise points typically come to mind first, but there are others. For a complete list of reward cards offered in Canada, check out this credit card selector tool.
Different companies have different policies about how long points are valid or what stipulations there might be about how the points are earned and/or redeemed. Keep an eye out for points that expire and make sure you’ll either be able to use what you’ve earned or switch to a different card. When collecting travel rewards, having some flexibility with booking vacation time, e.g. around work schedules or family commitments, makes it much easier to use your points.
Plan How to Use Credit Card Points or Loyalty Rewards - Save on Buying Gifts at Christmas
Beyond travel there are many great ways to use all the different points that credit card companies offer, and in varying amounts. Smaller rewards, like movie tickets or gifts cards for dinner out, require fewer points and thus less spending to receive. Redeeming reward points in the months leading up to Christmas can help stretch your gift-giving budget. However, if you’re not in a position to pay your cards off in full every month, your focus should not be on collecting points; it should be on getting out of debt.