Are Rewards Cards Costing You Money?

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.

Some of the top cashback credit cards and best travel rewards credit cards come with an annual fee as well.

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.

Related: How To Boost Your Credit Card Rewards

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?


12 Responses to Are Rewards Cards Costing You Money?

  1. Nice post. Like you, I love redeeming PC points for gas cards and the like. Money well spent for us.

  2. I always think to myself that to compensate for guys like me who just pay their full balance every month and collect the rewards, there must be several people out there getting killed on interest in order to make it profitable for the credit company. Without people racking up lots of debt and making minimum payments, Visa wouldn’t be able to offer the crazy programs that they do, so I guess in a sick way I should be thankful to irresponsible spenders?

  3. Krantcents says:

    Exercising responsible financial behavior should not be so unusual! Taking control of your finances goes way beyond a credit card too.

  4. Jim Yih says:

    Well said Robb! I use one credit card for everything so I can collect meaningful points. I see too many people collecting point here, there and everywhere and then not having enough points anywhere to do anything meaningful with their points.

  5. Echo says:

    @Mark
    Redeeming rewards points for free products has become one of my core savings strategies. It’s pretty tough to find $500/year in savings just by cutting expenses.

    @My University Money
    I feel the same way, but I’d like to think that credit card companies came up with rewards cards to lure the debt free and loyal debit card users back to using credit cards again, and then making their money off of the merchant fees. But your comment makes more sense.

    @krantcents
    That’s what makes personal finance so personal, what works for some doesn’t work for others.

    @Jim
    Thanks Jim! Meaningful points, I couldn’t have said it any better myself.

  6. I have three rewards cards :( And it annoys me to no end that they all can’t co-exist harmoniously, but some cards give out better rewards than others.

    Did you see the memo (speaking of rewards) from Air Miles that the toolbar is no longer? :(

    Goodbye 15 miles a month for us, it was nice while it lasted though!

  7. Ross Taylor says:

    I like this article. Me and myself, I am weaning off the Aerogold Visa and onto the TD Infinite card -(a couple of the other banks offer similar) – I want to spend the rewards without restrictions and without the moving target of a hugely changing price for my desired flight depending on supply and demand.

  8. Rachel Levington says:

    Rewards cards can be a great thing if you’re careful. However, if you don’t pay off your balance each month and let that interest rate hit you — not such a good thing. You can contact your creditors to request they lower your interest rates. Most likely they will if you use an automatic debit payment each month.

  9. bodynsoil says:

    Good post for many people to follow. I do only use one point card that charges $45 for the point system and is American Express. I use that one card for most purchases including groceries. At the end of the month they require payment in full, no balance carried forward. The points add up to almost a thousand dollars in rebates annually, which we can take in cash, gas, gift certificates or many other various things, I am getting my $45 out of it for sure.

  10. I don’t think they cost you money – they make us money.

    My wife and I are going to Europe (possibly another third trip) on our Alaska Air Miles.

    We also get Companion Fare pricing at $99 (great for Hawaii trips).

    You have to be disciplined to use the cards though.

  11. Bee says:

    Thanks a lot! Great post! And just in time for me! I don’t have any rewards Card. But a friend of mine does. And she likes to pay all the possible bills with her card like paying for a big company in a restaurant with her card and getting from us cash instead. So she could two times per year use her miles to fly somewhere she wanted. Looking at this I decided to step in and to try a rewards card. But it’s not so easy to find the right one. I think I already wrote here that I found a comparison tool for Canadian cards but I’m still in doubts. Looks like CapitalOne has the best offer. Is it really so? I’d like to get a live impression. Thanks!

  12. Ginger says:

    I use reward credit cards and average about $100-$150 back a year but this year got enough points to pay for 4 nights at a hotel when we went back to our home town for the wedding and a night in Hawaii after our cruise (total value over $900). I stay under my budget so I do not think I am spending more with credit cards, I don’t pay any interest or annual fees so really I making money not loosing money with reward cards.

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