Are Reward Credit Cards Worth the Cost?

Credit CardsCanadian Credit Card Debt

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 doesn’t even include any mortgage debt. Trahair went on to examine the report in detail, which came to the independent conclusion that most Canadian household debt was likely being carried on lines of credit to pay off credit cards (Crushing Debt, pg.78).But for those without lines of credit, it’s not such a good deal.

The Prime borrowing rate in Canada for a secured LOC (Line of Credit) or RRSP Loan is currently around 4%, but MasterCard is a whopping 19%, and Visa is usually a little lower in the 9% to 15% range (TD Emerald Visa is currently prime + 1.9% to 6.9%). Of course you can negotiate with Visa if you have great credit, but there is a bottom limit to what the credit card company is willing to go on your card. With revolving credit rates between 9% to 19%, and low minimum payments, it’s not surprising most people are not paying 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.

The Perks Aren’t 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, then a travel card with a high interest rate and annual membership fee isn’t worth it. 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.

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. To put this in context, if you were to currently fly from Vancouver to Toronto, the cost of your flight is approximately $684 (taxes included). So with an Air Miles Amex reward card as an example (10:1 ratio), your ticket to Toronto just cost you $6840.00 dollars.

Low Rate Cards Are a Better Deal

If you are the person who does indeed use your travel or gas 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, such as the TD Emerald Visa. This card currently has a 4.75% purchase rate with only a $25 annual membership fee (prime + 1.9% to 6.9%). While you don’t get the perks, you don’t pay expensive membership fees or the top interest rates either.

Readers, what are your thoughts? Do you like your credit card reward points, or do you prefer the lower rate cards? Canadian readers, what’s the best deal you have negotiated for your credit card rate?

11 Responses to “Are Reward Credit Cards Worth the Cost?”

  1. i really don’t understand why anyone would want to carry a balance just for the perks. That 3-5% cash back isn’t worth the 19% interest rate.

    Reply to this comment
  2. The Dividend Ninja

    Jan 22. 2012

    Marissa thanx posting! I completely agree with you, but for various reasons people do end up carrying balances on their credit cards. For most people, imo, it’s not worth the rewards when a low rate credit card would be a better option for them.

    Cheers

    Reply to this comment
  3. yvrdad

    Jan 22. 2012

    I recently got rid of my CIBC Aeroplan Visa where i was paying $170 per year for two cards. I have switched to a cashback reward – no annual fees. In the past 6 months, i’ve already earned over $400 in reward cash! It sure beats paying the annual fee!

    Reply to this comment
  4. Cris

    Jan 23. 2012

    I am not convinced that there is any real benefit to the travel cards. The ratio numbers are rather enlightening: 10-40 to 1??

    I use a cash-back card with no annual fee. I always pay my bill in full and every so often I receive a cheque. I look at it as a bonus, rather than something that I am having to “work” towards. Simple and I like the liquidity.

    Reply to this comment
  5. The Dividend Ninja

    Jan 23. 2012

    Chris That’s the way to do it 🙂

    Reply to this comment
  6. AnonCoward

    Jan 24. 2012

    I guess there’s more than one way to look at what you do with your “rewards” (be it cash-back or points). Personally I am fortunate to manage my cash flow according to my income so I have an Airmiles MC. I originally couldn’t decide between just using my Cash-Back Visa and weighed the pros and cons of a spending budget of ~10k. Using the Visa I would get back ~100/yr whereas the airmiles would allow me to rent a car 1-2 times a year. Depending on what you use your points for you can get ripped off or get a good deal, you just need to know what your goals are.

    Reply to this comment
  7. Kuku

    Feb 05. 2012

    Credit cards are great if you pay off your entire balance every month. This is easy to arrange through preauthorized payments. In such situations, the interest rate is of little consequence.

    The type of credit card that is suitable for every body depends on personal situation and spending pattern.

    I pay about $120 per year but collect back over $ 5-600 in real travel benefits with no restriction on mode of travel or carrier. To me this is a great deal.

    THE BOTTOM LINE – DO NOT CHARGE IF YOU CANNOT AFFORD TO PAY OFF THE BALANCE AND ABSOLUTELY NO CASH ADVANCES UNDER ANY CIRCUMSTANCES.

    Credit card companies may hate customers like me but they make enough from merchants. I will pay cash if the merchant is willing to pay me 2-3 percent discount.

    Reply to this comment
    • The Dividend Ninja

      Feb 05. 2012

      Kuku Thanx for posting,and I completely agree with you 🙂 Prudent advice here!

      I’m in process of receiving my new Air Miles credit card becuase, as you mention, for me travel rewards are what I am after. The $65 annual fee will be well worth the perks I get. Unfortunately for most people, or for whatever reasons, they do end up carrying a balance. The low rate cards such as TD Emerald Visa are a better choice for these folks IMO 😉

      Credit card companies love revolvers (people who carry a balance), but they don’t mind poeple who pay them off becuase they are the exception.

      Cheers!

      Reply to this comment

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