Credit Cards and Debt

Are Reward Credit Cards Worth the Cost?

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credit cardsCredit card debt has become a fact of life for most Canadians and Americans. The unfortunate reality in our society is that most people are not able to pay off their debts. According to David Trahair, in his recent book Crushing Debt, the average Canadian has approximately $25K in household consumer debt (credit cards and lines of credit). This amount was provided from a TransUnion independent report, and is in addition to any mortgage debt. It’s likely a similar scenario for Americans as well.

The TransUnion report also indicated that Canadians were using their lines of credit (LOC) and Home Equity Lines of Credit (HELIOC) to pay off their credit cards. In other words, many Canadians continued to use their credit cards and simply shifted the balance to the line of credit with its lower rate. Although Lines of Credit offer substantially lower rates than credit cards, the frightening fact is many Canadians and Americans are continually carrying a balance on their credit cards. For those who don’t have secured lines of credit, purchasing items now with the intent to pay later on their credit cards has become a way of life.

With revolving credit rates between 12% to 19%, and low minimum payments, it’s not surprising most people are not able to pay off their credit cards. That’s why it’s as important as ever, to get the best credit card that gives you the best deal. For most people, that means using a low interest rate credit card, as opposed to a fancy rewards card with overpriced perks and annual fees.

Are The Perks Worth It?

The best credit cards don’t always come with perks or travel points. If you include the annual fees, a high interest rate, and the actual dollar amount you pay for the rewards, you likely don’t come out ahead. If you don’t travel extensively, or use your credit card rewards often enough, then think twice before signing up for one.

Reward cards often have annual membership fees (over $100 for gold cards), and if it’s a MasterCard then your likely paying the higher %19 rate. Combining a membership fee with a high interest rate, means you are simply paying too much for your rewards if you don’t pay off your balance.

In addition, the reward points by most credit cards tend to have a ratio of 10 to 40 for each dollar spent. This means you need to spend $10 to $40 for every $1 of rewards. For example a flight from Vancouver to San Francisco return, would currently cost me around $400 CAN. If was to use my Air Miles AMEX rewards card, with a 15:1 point ratio, then my ticket to San Francisco just cost me $6000! In other words, by using my credit card, I had to spend $6000, to be able to get enough points to redeem for a flight worth $400.

Low Rate Cards Are a Better Deal

If you are the person who does indeed use your travel or reward points, and you can pay off your credit card in full every month, then it’s a good deal. You are getting a great kickback on money you are spending anyway. But if you carry any kind of balance, or unable to pay off your credit card every month, then you really should look into the low rate credit cards. While you won’t be getting the nice perks or rewards, you won’t be over-paying for them either. 😉

Readers, what are your thoughts? Do you like your credit card rewards, or do you prefer the lower rate cards?

7 Comments

  1. farcodev

    Personally I have the luxury now to don’t bother w/ credit card rates since this year because I’m debt (slavery) free (yah!!) . So when I use them it’s because I have already the cash to cover the expenses in real time.

    I use the principle that the cash I spend in my groceries is lost anyway, so to receive 2% of cash back is a real bonus. For the other expenses it’s 1%.

    The other is the Visa RBC w/ reards points, but I don’t use it much anymore because I prefer the Mastercard, and its rewards… well they aren’t really motivating, apart for some gift cards… 😀

    I planned to get the MBNA but since BNS changed the rewards it’s not so cool.

    My 2 cents 🙂
    For the fees, the one for the visa is reimbursed automatically, because of my account, and the mastercard cash back is free.

    • Debt free is awesome! Way to go Farcodev!! I was until I revently took a small RRSP loan. 😉

      I have an Air Miles AMEX Platinum card I use for purchases and then pay off. It gives me one Air Mile for every $10 at gorcery stores, and $15 on everythign else. I got that card a few months ago, and I now have enough Air Miles to fly to my next blogging convention for free. The Air Miles are more valuable to me than the 2% cash back. 😉

      Cheers

  2. If you pay your full balance each month, reward cards are generally worth it. However, not all reward cards are equivalent. Some are probably better than other.

    Personnally, I have a MC reward card that allows me to convert my rewards into RRSP contributions. Not bad!

    However, if someone keeps a balance on its credit card, I don’t think that any reward will compensate for the sky-high interest rates credit cart companies charge.

    A credit card is a tool. If you use it well, it can yield great results.

    • Hi TDE,

      First off, I like your site and have subscribed. I’m going to enjoy following your posts. 🙂

      A MC that lets you convert your rewards into RRSP contributions. That sounds great, please do tell me more! I had no idea such a thing existed.

      Agreed a credit card is a tool. My MC has promotional rates at 1.99%, and my AMEX gives me tons of Air Miles. I love it!

      Cheers

      • My MC card is with National Bank of Canada, as is my discount broker. One the gift you can buy with the rewards are 100$ contribution to my RRSP in my discount broker’s account. So every time I reach the proper amount of reward points, I “buy” a 100$ contribution.

        For my site, well it is recent and still in development. In that sense, if you have comments or suggestions, please do not hesitate.

        Have a nice day!

  3. I also do not carry balances on credit cards and never have. I pay it in full. I have switched from a reward credit card to a cash back last year and got my first taste of the cash back by receiving $984. 4% cash back on fuel is really nice 🙂 considering I spent about $400 per month for both vehicles.

    Well done on the site!

    • PIE thanx for the kudos! Maybe I should buy your site now. 🙂 Yes, for you cash back, nicely done, and for me Air Miles. I love flying to blogging conventions without paying for the flights. 🙂

      Cheers

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