The problem with credit card rewards programs

No rewards for bad behaviour

Whether it’s cash back, points or miles, credit card reward programs are a zero-sum game for some spenders


credit score

So many things in this world of ours sound better in theory than they actually are in real life. Like $7.99 all-you-can-eat buffets, BeDazzlers and the latest X-Files reboot. There are also a number of things in the world of personal finance that sometimes turn out to be not quite as shiny as advertised. Case in point: credit card rewards programs.

Please don’t yell at me. I know, I know, Canadians love their reward programs with a passion normally reserved for hockey, poutine and their morning Timmies. What’s not to love? Money for nothing (and your chicks for free). Please hear me out.

No matter how you slice it, here’s the inescapable truth you need to know about credit card rewards programs. In order to collect the bounty, you have to use your credit card. And in order to reap a lot of rewards, you have to use your credit card a lot. For many folks, using their credit card a lot is in itself a bit of a problem.

There are basically two types of reward programs. First, there are the ones that dole out points or miles whenever the cardholder borrows with their card. (Please note that when you “pay” for something with your card, you don’t actually pay, you borrow.) Once cardholders have accumulated enough points or miles, they can redeem them for gifts, consumer goods or travel. Then there are the cash-back programs that rebate cardholders a small percentage—usually around 1% of the amount they borrowed.

One of the challenges with the points/miles programs is how difficult it is to determine the true value of the points. It varies from card to card and can depend on what they are redeemed for but in general, the rewards are rarely worth more than 1% of the amount borrowed. As well, some travel reward cards are notorious for having strict restrictions and tacking on additional fees. The value of cash-back programs are generally easier to calculate, but many of them have restrictive conditions, too. For example, a card might advertise an attractive, large cash-back percentage but when you read the fine print, certain conditions and restrictions apply. You quickly find out that the big percentage is only for a limited introductory time after which it drops like a proverbial brick. Other cash-back programs offer up larger percentages on specific shopping categories like gas or groceries and far less on the rest of your purchases. Heed the small print carefully.

I find it’s helpful to calculate how much you actually need to spend with your credit card in order to receive a certain value of reward. The math is relatively simple. Based on a pretty typical 1% cash-back program, in order to earn $100 in rewards you would need to spend $10,000. It’s possible to spend $50,000 on a card and earn just $500 in rewards. According to Statistics Canada, the average Canadian earns less than $50,000 in a year, so spending (borrowing) 50 grand on a credit card to get half an iPad might not be the best of ideas. Moreover, if that card has a not-uncommon annual fee of $99, you might need to spend up to $10,000 to break even on it.

It should go without saying that if you carry a balance on your card, any rewards you receive are tiny in comparison to the interest you pay. That said, a lot of people suggest that “as long as you pay your monthly bill in full, follow a strict budget and only use your credit card to buy the things you were going to buy anyhow, why not get a little something back for yourself via the card’s rewards program?” I get that. But that’s kind of like telling the Leafs that all they have to do to win the Stanley Cup next year is to score more goals than their opposition every night. It’s easier said than done. Your opposition might not be wearing skates but marketers, retailers and your credit card provider all know that people tend to spend more when they borrow with their credit cards than they do when they pay with cash. They’re banking on it.

Literally. As David Chilton noted in The Wealthy Barber Returns, “flights ‘earned’ through excessive credit card use are akin to the hotel rooms Vegas offers to heavy gamblers.” Many of us would be much better off to simply leave the plastic in our wallets, forego the rewards programs altogether and shop with cash.

As you can imagine, this stance has gotten me into a number of spirited conversations with friends and colleagues who view their rewards programs somewhat differently than I do. Fair enough, I respect their opinions. And yes, I really do understand that it’s theoretically possible for people to follow a strict budget, use their credit card responsibly and take advantage of a rewards program. It’s also theoretically possible for Justin Bieber to become our Governor General someday, but because something is possible doesn’t mean it’s likely to happen.

Please note that I have no problem with reward programs per se; it’s only credit card rewards that put a bug up my bum. I have an Air Miles credit card in my wallet and use it whenever I buy gas or visit the liquor store. One day, I hope to have enough points for  a shiny new calculator and some sticky notes at Staples, but I’m not banking on it.