Ahh, credit card rewards. One of the most talked about ‘features’ of a credit card these days. Credit card rewards are becoming increasingly popular (and increasingly profitable for the big banks). But are all the perks and rewards all they’re cracked up to be?
It seems you can’t visit any site these days, without being bombarded with another credit card ad (you shouldn’t see one on mine, email me if you do). Not only that, they’ve also seemingly become easier and easier to have access to. Back when I was in university I remember, just outside our campus student centre, stood rows of salespeople behind rows of desks pushing “free” credit cards to unsuspecting students. Many of whom signed up, all to get that free shitty cell phone they never wanted or that oversized Bank t-shirt: “sorry, we only have an extra large, sir” (Really? For a t-shirt??).
A good friend of mine also got a credit card at the time, with no job, no income. I thought that was funny then, but what’s even more striking now is I am starting to read stories of some high school students getting offered cards. Yes, high school students! As a dad, that gets me boiling. Even sites like these, have begun springing up, offering up high school student credit card tips!
Yes, used responsibly (not using them for things you can’t afford and everyday purchases), I think there are definitely some benefits to having them. Mainly the grace period (if you pay in full and on time) and the convenience. But the most often cited benefit is their rewards. But is that benefit overstated?
“Peace is its own reward” - Mahatma Gandhi
To me, I’d rather have peace of mind. Look I’m not here to tell you not to get any, and that all credit cards are evil – I own two of my own. But I’m also not here to tell you to save up, pay down debt and then sign up for multiple credit cards, to cash in on all the rewards and introductory bonus offers. Catch my drift?
Hey, if you’re going to sign up for a credit card, yeah sure, you might as well go with a no-fee rewards card. But don’t rely on them to pay your way through vacations, or line your pockets with cash. It seems like a flawed concept to me: you have to spend more, to make (a little) more.
I remember when I first signed up for my first travel card, I got sold on all the perks too and I guess they weren’t too bad for a while. But most big travel rewards cards today, that offer partnerships with airline programs like Air Miles and Aeroplan aren’t what they used to be. Reducing the quality of what you get, while increasing the rate it takes you to get to them. Most of these points programs have also recently starting introducing expiry dates on your points. And to top it off, according to Consumer Reports, a whopping 78% of credit card airline miles are never redeemed.
Cash-reward credit cards are usually the best deal, because in the end you get cash. But at 1 or 2 percent (the best rates I’m seeing in Canada right now), depending on if you get groceries or gas, or whatever other limits they put on these cards, you have to spend a lot to get a little back. And most of these credit cards have different tiers of rewards. Get 2% back on the first $3000 in purchases, 1% on the next $10,000 and so on and so on. So on a 2% cash-back card (not including introductory offers and provided you get 2% for the full term), you would have to spend $100,000 to get the $2,000 vacation you always wanted. And if you have $100,000 to spend, please contact me.
Budgeting with cards: a dangerous game
Now some will say, “but so what? credit card rewards are free money” (provided you pay your balance in full and don’t sign up for a card with an annual fee). And you know, it’s not those that are just using them to earn a few rewards that I’m worried about. I’m more worried about the ones that say “Well I can throw all my expenses on my card, use my card to budget and I can ‘reward myself’ with a trip a year!” Or people applying for multiple credit cards over and over to rack up all the introductory bonus points and miles. Not very credit-wise. After witnessing the majority of my marketing team that I was part of, get let go at my job earlier this year, some of which are still looking for work, I know unemployment is a very near reality. What would you do if you lost your job and all of a sudden all your expenses were neatly funnelled into a credit card at an 18.99% interest rate?
It’s not a game! A recent Hariss/Decima survey found that half of Canadians with credit card balances say they often or always carry a balance. Now you might say “But Anthony, I always pay my bills in full every month.” Yes, so do I, but things happen and I don’t know about you, but I never want to find out what the “what if” is like.
Will it be cash or debit?
To throw in another wrench in the rewards argument: studies show that people spend more when using credit cards instead of cash. According to finance author, Dave Ramsey, anywhere from 12 to 18 percent more. Now, spending 12 to 18 percent more to get 2 percent sounds like a pretty crummy deal to me. And I think, when it’s a rewards credit card, even more so, as you’re tempted to shop more to earn the extra reward miles.
When you pay with cash, you’re paying with what you have, so you’re less inclined to spend more. Not to mention you can negotiate a lot better deals. So next time you pull out your wallet, reach for the cash or debit card instead. For the majority of my everyday transactions, I use a debit card. Yes, I probably do end up spending a little more than if I used cash, but like cash, you can only spend what you have. I also like the fact that it’s instant. So, if I see my account getting low, I immediately put on my savings hat and can act quickly. It provides just as much security as a credit card does and I find it’s much easier to keep track of than cash. And no credit card rewards to entice you to spend more. No more reaching for that slightly more expensive bottle of wine you’ve never tried/liked anyway at the local liquor store, just because it has an extra 20 bonus air miles. You’re probably chuckling to yourself, because we’ve all done it!
Use credit cards wisely, don’t let them use you. And for goodness sake, stop preaching the perks, there’s enough people in debt that don’t need to hear it anymore than they already do and besides, the banks are already doing a pretty good job of that.