Paying for your rewards

Point cards offer some great perks—but only in the right hands. Bruce Sellery says they’re not worth it if you’re spending just to collect the rewards.

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Question

I want to know how Canadians who are in the market for a rewards credit card should narrow down their choice.

Answer

I received this question from a business writer the other day. He’ll do a great job helping people narrow down their choices among the various rewards cards, but his question raised another issue for me, that is: who should be in the market for a rewards credit card? Perhaps not surprisingly, I have never been asked this question before.

Advantage of a rewards card

On my TV show “Million Dollar Neighbourhood” we challenged the families to go “cash-only” for 10 weeks to mitigate the increased spending that credit cards can lead to. One smart and sassy woman yelled out what a lot of people in the crowd were thinking: “What? And miss out on all the points?”

Earning points is the main advantage to using a rewards credit card—points which you can use towards free flights, hotels and appliances like the “Portion Control Bench Scale.” (I love the irony of this one: Spend more money and we’ll help you eat less).

Disadvantage of a rewards card

The main disadvantage of using a rewards card is that they “reward” you for shopping. If that is already an area that you struggle with, these cards are not good for you.

As a former brand manager at Procter & Gamble, I spent a lot of time and energy trying to figure out how to get people to buy more. We used strategies like “jumbo packs,” “buy one get one free,” and my favourite, “for a limited time only.” That’s the marketing game and I think I played it pretty well.

Now I’m playing a new game called “Moolala.” The intention is to inspire people to get a handle on their money so they can live the life they want. Winning at this game sometimes means encouraging people to spend less, not more.

Don’t sign up for a rewards card if you carry a balance

Should you have a rewards card? Not if you carry an outstanding balance on your credit card for more than three months out of the year. Period. Don’t have one.

Here’s why: You don’t want to be rewarded for spending. You want to be rewarded for eliminating your debt because it is robbing you of getting what you really want in life.

The mileage mirage

“But what about the points? Aren’t they worth anything.” Yes, the points are worth something, but not as much as you think.

Let’s say you have a rewards card that gives you one mile for every $1 you spend. If you spend $15,000, you earn 15,000 miles, which will get you a return flight from Toronto to New York City through Aeroplan. Pay out of pocket for that and it is about $400, before taxes, meaning that for every $1 you spend, you get $0.03 in value from your rewards card. That is a benefit of 3%.

Provided you were going to spend that $1 anyway, the reward is a nice perk and you’re smarter to use a reward card than not.

However, if you’re someone who doesn’t pay off your credit card every month, you need to curb your spending. Using a credit card, especially a rewards card, isn’t going to help do that. The benefit of the points is exceeded by the cost of you spending more than you have and paying crazy amounts of interest on the accompanying debt.

I love earning miles and they certainly do add up over time. But if you have a problem with credit card debt, let’s get real: The psychological benefit of getting something for free is worth more than the actual miles. And that way of thinking and behaving may be one of the reasons you’re in this situation in the first place.

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Please send your money questions to Bruce Sellery at ask@moneysense.ca.

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