How rewards cards can cost you money

If used improperly, rewards cards can be a hidden drain on your finances.



Online only.



I’m always surprised at the ways in which we are able to delude ourselves. We take a perfectly good idea, shave it, twist it, roll it around, and then we execute a not-such-a-great idea. Case in point: reward cards.

In theory reward cards are great. You do shopping for stuff you’re gonna buy anyway and by using the right rewards card you can get anything from money back to free vacations. What’s not to like? Like Dire Straits said, “Money for nothin’.”

Maybe not.

If you’re dumb enough to be carrying a balance on one of those reward cards, you are more than paying for your “free” stuff with the high interest you’re forking over every month. Most reward cards charge interest in the 20%+ range. Carry a $5,000 balance and you’re looking at about $1,000 a year in interest.

Maybe you’re not carrying a balance. You pay your balance off in full and on time every single month. Score one for you. But did you know that the fact that you have a rewards card could mean you’re spending more money than you would without one?

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 and in credit-card debt of $115 a month…”

And then there are the folks who fork over good money to participate in a rewards program with restrictions on what they can do with their “points.” When I was considering a cash-back card recently, I weighed. the cost of the card against the annual fee and the cap on the rewards. Really? you want to charge me AND cap my savings? Hmm … and decided it just wasn’t worth the aggravation.

Reward cards make sense only if you’re not carrying a balance – EVER – and the benefits far outweigh any fees you may have to pay. And only if you are rigorous about not buying more to earn more points. If you’re not sure your card’s working for YOU, cancel it.

11 comments on “How rewards cards can cost you money

  1. When I consider a rewards credit card, the interest rate doesn't matter, because I arrange to have the balance always paid off in full by the due date. What I do consider is where do I have to shop to get the rewards. If it means going to some very fancy restaurants or specialty stores to earn extra rewards, that is a 'minus' as around my little town there aren't too many fancy restaurants or specialty stores. However if it gives you extra rewards for everyday needs like…groceries, pharmacies, gas, recurring/automatic payments, etc., that is a 'plus' to me. I use my card for absolutely everything, including a purchase under $5 at a 'dollarama'. Any of my regular bills like heating oil, cell phone, utilities and even property taxes (and I own 3 properties free & clear) are put on my rewards cards.


    • I also look at what other benefits the card offers, like purchase protection, extended warranty, out of country medical insurance, car rental insurance (for those trips out of town), etc, etc., which is a 'plus' to me as it would normally cost for those features separately. And lastly I look at the annual fee. If the cost of the fee would be covered by rewards on my normal purchases (i.e. not large purchases like car repairs), I sign up for the card. If not, the card is not for me. A rewards credit card is fabulous if you can utilize the majority of the benefits it offers, based on your individual needs and lifestyle and be disciplined….That's my two-cents of advice.


    • How do you pay your property taxes with a credit card?


  2. I only use rewards programs that don't need me to use a credit card. Air Miles, Club Sobeys, etc. But you're right: you really have to watch that you're not spending just to get your rewards. That doesn't make mathematical sense.

    If I'm going to take advantage of bonus Air Miles or Club Sobeys points, the item also has to be on sale for a great price AND already be on my list. If not, it's not worth buying. No, I don't rack up huge amounts of points, but I'm debt free and saving, which is far more valuable.


  3. Anywhere that will take my credit card, without charging me a fee for using it, I will use my credit card. tAs long as I'm not penalized, I will use my credit card AND collect points at the same time – phone bill, internet service, groceries, prescriptions, school tuition, books, etc.

    I am very disciplined about where I spend money (since I almost never use cash, I treat my credit card as if it's cash) so I don't buy anything I wouldn't have bought without the incentive.

    I always pay my bill in full as soon as the bill comes in the mail. The interest is at 29.99% so there is absolutely no way I would let myself pay it late.

    The other day I actually MADE money using my card. I purchased an item with my points ($50 worth), but was not happy with the product. When I returned it to the store, they where unable to put the points back on the card, so they credited the card with the $50. That means that I will have $50 credited on my next bill!!


  4. I have Air Miles. I pay off my card each month, and sometimes I do spend more than usual, but on things that will last me long term, in the short term. For example, if my drugstore has a sale on vitamins with bonus air miles, I'll buy the vitamins with a long expiry date. I know eventually I'll go through them, so in the short term, I paid more, but in the long term I will use them anyway, and get the air miles benefit as well.


  5. I recently obtained a Rewards card from my bank when one of the tellers told me that it would be free (normally a $120 annual fee) due to my account balance. Suggetion : If you have a healthy balance in your account ask your bank what they can do for YOU. This not the kind of info they give out freely – you have to ask. Thought I`d pass that on


  6. I love Gail. We finally have someone to put as straight! I do have credit cards with the airmiles rewards and I do watch what I buy. I pay in full and never missed a payment on time for 8 years. My cards are free as I have called each card company and negotiated with them. I have travel numerous times with my family only paying the taxes and other air line charges. You can enjoy the benefits are cards out there as long as you are in CONTROL! Thanks Gail for all of your efforts in providing the wisdom of money :) ALWAYS A FAN


    • I agree with ALWAYS A FAN, if you are IN CONTROL of your credit cards they are a fantastic way to get free trips or free merchandise. I have a Visa which gives me travel points and I am very aware that the interest rate is high, so it gets paid off every month. But with two children in university I paid their tuition using the card and was able to fly my older son home for their graduation using points earned by their tuition payments. Win Win situation!! Even with day to day spending I earn at least one trip per year from my visa!


  7. we are considering a walmart card. any thoughts?


  8. Please prepare a comparison chart for credit cards that would be good for post secondary students. Also, which banks offer good student banking packages? This would make for a great article that I am sure many parents would like to see and learn from.


Leave a comment

Your email address will not be published. Required fields are marked *