Rewards Credit Cards

Credit card issuers are constantly coming up with new programs and incentives that appeal to new customers. One way they do this is by offering credit cards with rewards. Whether those rewards are travel-related, cash back, free merchandise or more, these credit cards promise perks to consumers who use them for purchases and to simply sign-up.


What is a rewards credit card?

A rewards credit card provides a tangible benefit to the consumer. In return for signing up and using the card, your purchases1 help you accumulate points or credits, which you can eventually redeem for something of significant value, such as a flight or vacation.

Keep in mind that to accumulate and redeem your rewards, your account with the credit card issuer has to be in “good standing”, meaning you are not delinquent in making your minimum monthly payment.


Types of rewards credit cards

There are many different kinds of rewards credit cards, but some are more common than others. The most widely-offered rewards credit cards are:

  • Travel cards:Travel rewards credit cards offer travel points every time you make a purchase, which can be redeemed for things like plane tickets or hotel rooms. When you sign up for a travel rewards credit card, the card issuer will tell you how many points you receive per dollar spent, and how much the points are worth when redeemed. Some credit card issuers will even award you a sign-up bonus in the form of more travel points just for getting the card. With travel cards, it’s important to understand how the points are valued and can be redeemed. With some cards, you can only fly on certain airlines or select certain seats. Most importantly, make sure your points never expire or you may lose all the rewards you have accumulated.

Compare travel rewards cards

Find the best travel rewards credit card for all your travel needs.

  • Cash back cards: Cash back credit cards offer cash rebates on whatever you spend. For every dollar you put on a cash back card, it is not uncommon to receive 0.75-2.00% cash back. In Canada, the maximum cash back you can earn on gas, groceries, dining out and entertainment is 4.00%, or sometimes as much as 5.00% with special promotions. In effect, the lure of these cards is that they make your purchases slightly cheaper. For that reason, using a cash back card is more rewarding than using debit or cash. Be aware, however, that not all purchases may receive the same cash back percentage. For example, the Scotia Momentum VISA Infinite offers 4.00% cash back on gas and groceries but only 2.00% cash back on drug store purchases. In addition, some credit card agreements stipulate a maximum cash back rebate you can receive per year. For example, the Scotia Momentum VISA Infinite only allows 4.00% cash back on the first $25,000.00 of gas and groceries; beyond that, you will only receive 1.00% cash back.

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  • Store credit cards: Store credit cards are linked to specific retailers and offer points that can be redeemed for merchandise. While these credit cards often offer substantial savings just for signing up, the interest fees are very high. Consider instead a shop-anywhere card with increased benefits for a particular store. For example, the Target RBC MasterCard offers 5.00% cash back at Target and 0.5% cash back everywhere else.

Insurance products attached to rewards credit cards

The advantages of rewards cards are not limited to the points, cash back or free merchandise you may earn. Most rewards cards also come with various kinds of insurance products you can use. From travel medical insurance and trip cancellation insurance, to rental car collision and damage coverage, these products come at no extra cost and provide meaningful value to the cardholder. Find out more on this page.


Compare the rewards vs. the costs

It’s important to remember that rewards credit cards may come with certain fees: namely, annual fees and interest charges on balances.

Annual fee vs. no fee credit cards

Not all rewards credit cards come with annual fees, but many do. In general, the cards with annual fees have greater rewards attached to them. In these cases, to get the rewards it’s not enough to pay for things with the card: you have pay for the privilege of the card itself. If you don’t plan on using the card very often, or don’t value the rewards highly, a card with an annual fee might not be the best choice. In this case, consider a no fee credit card that offers fewer rewards. On the other hand, if you’re committed to using a rewards credit card responsibly, you can earn rewards that far outweigh the annual fees.

Interest charges

Rewards credit cards focus consumers’ attention on the benefits of having a particular card. However, you still have to keep an eye on the annual interest rate attached to the card. As it happens, rewards cards tend to carry higher interest rates than cards without perks. This won’t be an issue if you diligently pay off your balance in full every month, but if you maintain a balance it can be quite costly. The higher interest charges can more than offset whatever benefits you are receiving by using the card.

Example: No rewards vs. rewards credit card

Peter is looking at two CIBC VISA cards. The first card, the CIBC Select VISA, is a low-interest credit card that has a $29 annual fee and offers no rewards. The second card, the CIBC Dividend VISA, has no annual fee and offers 1.00% cash back on all purchases. Assume that Peter makes $20,000 of purchases in a year, and always pays his balance off in full. How do the two cards compare?

Annual Spending Annual Fee Cash Back Earned Total Cost to Peter
No Rewards Card $20,000.00 $29.00 $0.00 -$29.00
Rewards Card $20,000.00 $0.00 $20,000 x 1.00% = $200.00 +$200.00

In this example, Peter would’ve had to pay $29.00 to use the no rewards credit card. If he’d used the rewards credit card, instead, he would’ve come out with an extra $200.00.


Final thought: If you’re going to spend the money, you might as well benefit from it

Obviously, it’s not wise to spend money just to get rewards – especially if you have to carry a balance and pay interest charges. That said, if you’re already making purchases using your credit card, you might as well accumulate rewards along the way. Every month, 70% of Canadians pay off their balance in full2 , which indicates that they are not paying interest charges. If you’re part of this majority of cardholders, it makes sense to get paid for responsibly using your credit card.


References and Notes

  1. Balance transfers do not receive points. Some other purchases, such as casino chips, are also not eligible for points.
  2. http://www.cba.ca/en/media-room/50-backgrounders-on-banking-issues/123-credit-cards