More and more Canadians are spending their money using credit cards instead of cash or debit. There are many reasons for this, including the rising popularity of rewards programs and the proliferation in online shopping. Regardless of the motivation, we’re here to tell you who should be considering a rewards card and some of the not so obvious things to look for and avoid in rewards credit cards.
First off, if you plan on carrying a balance, meaning you intend to borrow money on your credit card or not pay your credit card down in full every month, a rewards card is NOT for you. In almost every case, you will do far better with a low interest credit card than with a rewards card.Interest costs for a rewards card are typically 19.99% – meaning on a $2000 balance, you will pay approximately $400 in interest cost per year. The typical rewards program will pay you 1% of your spend for a no fee card, a healthy program with an annual fee may pay you 2% of your spend. On $2000 of spend,that is $40 in earnings. That is $400 of interest costs, compared to $40 in rewards earnings. If you cut your interest costs in half to 9.99%, you will save over $200. So again, rule number one, if you intend on carrying a balance,get a low interest credit card, it will save you a lot more money than what you’ll earn from a rewards card. If this is you, you’re better of with a low rate card (9.99% APR) like the MBNA True Line Credit Card.
The second consideration, is which rewards credit card is right for you. There are many type of rewards credit cards. There are travel cards, cash back cards,grocery cards, pharmacy cards, gas cards, retailer cards etc… There are two things to consider in this equation. First, where will you be spending your money. Second, what type of rewards are you looking to redeem for. Depending on where you spend your money, different cards may provide you with different value.For example, some rewards cards offer double points in categories such as Grocery, Gas, Pharmacy & Travel, like the American Express Gold Rewards Card. Other credit cards offer 5% back on gas and groceries 1% back on everything else, like the MBNA SmartCash credit card. For proprietary cards like the new Target Mastercard or Westjet card you will get significantly more points for spending with them than you will elsewhere. So if most of your spend will come elsewhere, it doesn’t always make sense to use them.
The next consideration is what type of rewards you want to redeem for. Now here it gets a little tricky. You may think if you’re looking to get value for your gas spend, the best thing to do is to get a gas card, but that’s not necessarily the case. A cash back credit card offering 3-5% cash back on gas spend, is better than most gas cards on the market, and you get to do anything you’d like with the cash, and still enroll in Esso, Shell or Petro Canada discount gas program. Just make sure that you are happy with the types of travel, services, products, etc… that your rewards program allows you to redeem for.
The third consideration when choosing a rewards card, is to determine how much value you will be getting back for each dollar you spend on your credit card. There is a simple formula here, but the English version of it is to understand how many points you earn for each dollar spent(i.e. 1 point for every dollar spent) and how many points it costs you to buy any particular good (i.e. 15,000 points for a $150 item). Well in this particular example, it would equate to you receiving 1% back, since you would have to spend $15,000 to get $150 in value. Credit card companies are notorious for playing with the cardholders earn rate and burn rate to make it difficult to compare one program to another, and to hide how much value you are really getting from your credit card. There are sites out there designed to help you compare rewards programs apples to apples, and out site www.greedyrates.ca does have a tool to help you do just that.
The fourth consideration is how much you will spend on your credit card. Now the bonus points on some programs are fantastic and virtually start you off with a free flight. Others don’t. After that initial flight,remember that many travel programs, especially the ones that are not captive to one airline, offer on average between 1-3% of value for each dollar spent on your credit card. That means, if you’re looking to redeem for a flight that will cost $500, you will have to have spent between $16,000 and $50,000 in credit card spend. Most people don’t spend that much on their credit cards. As a result, they would be much better off with a credit card that gave them similar value i.e. 1-3% of spend, but for lower priced goods or services, or simply cash.
The fifth consideration in selecting the best credit card for you, and an increasingly important one, is how easy it is to redeem your points. What increments are you allowed to redeem in? Are there blackout dates that make it difficult to redeem your points for flights or rooms when or where you want to use them? Can you only use your points on return flights versus one way flights (forces you to wait twice as long to redeem your points)? Do your points expire?
The sixth consideration, when choosing a rewards credit card is assessing what I call the hidden hurdles. For example, how much do you have to spend to get your $250 sign-up bonus? What are the foreign exchange fees – 0%, 1% or 2.5%? Are there any caps to how many points you can earn or how much of your spend will earn at the highest rewards rate? For example, it’s all well and good when an issuer tells you you’ll be earning 5% cash back on pharmacy and restaurant spend, but what if you they said only up to $200 per month in spend and only for the first 6 months in the fine print? That’s why it’s important you take out your glasses and read the fine print!
The last consideration, and one that more people should consider, is what type of benefits does my credit card offer me, other than points. Many credit cards are now offering very attractive insurance benefits that are included in the card, that more than make up for the annual fee if you’re going to travel. For example, if you use your credit card to book your vacation, it could provide you with all the travel accident, trip cancellation,car rental/collision and travel medical insurance you need. The value of that insurance can be in the hundreds of dollars. First off make sure to compare and secondly make sure to check if your credit card already covers you next time you’re being pushed to take out car rental insurance, chances are your travel card already covers you!
That was probably more than you wanted to know, but we hope you found it helpful.