I am a big fan of using rewards cards to help save me money on my everyday spending. The way I see it, if I’m going to spend the money anyway, I might as well be putting some money back in my wallet in the form of points or rebates.
For years I have chosen to redeem Air Miles for gas gift certificates, used my PC MasterCard to accumulate PC Points that I redeem for free groceries each month, and collected Aeroplan miles to redeem for products or flights.
A Poor Use of Rewards Cards
Last week, Gail Vaz-Oxlade wrote in her MoneySense column about how rewards cards can cost you money. Gail made the following points, which I considered to be really good advice:
- If you are carrying a balance on your credit card you are trading a 1% rebate for 19% credit card interest rate. Not a good deal.
- Some rewards cards programs have an annual fee and place restrictions on how you can redeem your points. Members need to weigh the benefits of the rewards that are offered against the fees and restrictions in the program.
- You may be spending more money simply because you have a rewards card. According to a study done by the Federal Reserve Bank of Chicago and reported in The Wall Street Journal, “The initiation of a 1% cash rewards program yielded, on average, a $25 reward each month—and an increase in spending by $68 a month…”
Rewards Cards Aren’t That Complicated
I agree with Gail’s first point, you can’t consider using rewards cards to justify your spending when you are carrying a credit card balance from month-to-month, and I understand that Gail is a big proponent of the cash or envelope system (spend what you have, no more).
I pay for all of my purchases with my credit card to get free rewards rather than using my debit card and paying bank fees, it’s that simple. And I don’t care about credit card interest rates since I always pay off my credit card balance in full before the due date.
Annual Fees and Restrictions
When I first looked into rewards cards I preferred to use a card with no annual fee and high utility. I didn’t want to be paying $50, $100 or even $200 a year for the privilege of receiving rewards that may or may not equal what I’m spending.
Lately I’ve seen a number of high quality rewards credit cards, particularly travel rewards cards, which have an annual fee but offer a very lucrative rewards program without restrictions. The CIBC Aerogold VISA has an annual fee of $120, but the rewards for a frequent traveller are exceptional.
Spending More To Earn Rewards
I can see where a loyalty program like Air Miles can lure you into purchasing more of a certain item or brand because of bonus points (like buy 5 and get 100 bonus Air Miles).
You have to do the math to see if it’s worth purchasing. With a product like cereal, for example, buying 5 boxes and getting 100 Air Miles rewards is worth it for us because we go through a ton of it every month, and 100 Air Miles is like getting nearly $12 in free gas.
I found the study claiming that people spend more money with their rewards cards to be a bit of a weak argument. When I first got my rewards credit card I immediately looked for ways to maximize my rewards, which including setting up pre-authorizations to pay bills online.
Of course my spending increased, and I’m sure that was the point of credit card companies offering rewards cards, to get people to increase their use of credit cards.
When I worked in the hospitality industry we were encouraged to consolidate all of our spending onto the company purchase cards because they understood the collective power of everyone using the same credit card to maximize rewards.
Any small business should do the same, get a small business credit card and charge all of your daily business expenses to the card to maximize points.
Why should we manage our personal finances any different?