Do Credit Cards Offer Rewards?

Credit cards have become an integral part of modern financial life. At Financial Canadian, we often get asked: do credit cards offer rewards? The answer is a resounding yes.

In this post, we’ll explore the various types of credit card rewards, how they work, and how you can maximize their benefits while using credit responsibly.

What Are Credit Card Rewards?

Credit card rewards are incentives offered by card issuers to encourage spending and loyalty. These rewards come in various forms, each catering to different consumer preferences and spending habits.

Cash Back Rewards

Cash back rewards offer simplicity and direct value. For every purchase, cardholders earn a percentage back. The Tangerine Money-Back Credit Card, for example, provides 2% cash back on up to three categories of your choice, and 0.5% on all other purchases. This type of reward appeals to those who prefer straightforward financial benefits.

Travel Points and Miles

Travel enthusiasts often gravitate towards cards that offer points or miles. The TD Aeroplan Visa Infinite Card allows cardholders to earn Aeroplan points on every purchase. These points can be redeemed for flights, hotel stays, and other travel-related expenses.

Store-Specific Rewards

Many retailers partner with credit card companies to offer store-specific rewards. The PC Financial Mastercard (a popular choice among Canadian shoppers) offers PC Optimum points on purchases at Loblaws banner stores and Shoppers Drug Mart. These cards can significantly benefit frequent shoppers at specific retailers.

Lifestyle Rewards

Some credit cards cater to specific lifestyles. The Scotiabank Gold American Express Card offers accelerated points on dining and entertainment purchases. This category of rewards is gaining popularity, especially among millennials.

Selecting a rewards credit card requires aligning the rewards with your spending habits and financial goals. It’s advisable to review your monthly expenses to determine which type of rewards would benefit you most. The ideal reward is one that you’ll actually use and doesn’t encourage overspending.

As we move forward, let’s explore how these reward systems function and the mechanics behind earning and redeeming these enticing benefits.

How Credit Card Rewards Work

Earning Rewards: The Basics

Credit card rewards operate on a simple principle: spend money, earn benefits. Most reward credit cards in Canada offer a percentage back on purchases. The BMO CashBack Mastercard, for example, gives 3% cash back on grocery purchases, 1% on recurring bill payments, and 0.5% on everything else. Each swipe of your card accumulates rewards based on these percentages.

Some cards use a points system instead. The American Express Cobalt Card offers 5 points per $1 spent on eligible eats and drinks. These points can later be redeemed for various rewards (including travel, merchandise, or statement credits).

Redeeming Your Rewards

Redemption options differ widely between cards. Cash back rewards typically apply as statement credits or direct bank account deposits. The SimplyCash Preferred Card from American Express applies cash back as a credit to your account annually, appearing on the statement issued in September of each year.

Points-based systems offer more flexibility but can be more complex. With the TD First Class Travel Visa Infinite Card, points can be redeemed for travel bookings through Expedia For TD, including flights, hotels, and packages. Try to achieve a redemption value of at least 1 cent per point to ensure good value.

The Annual Fee Conundrum

Many rewards cards come with annual fees, ranging from $0 to over $700 for premium cards. The Scotiabank Momentum Visa Infinite card charges a $120 annual fee but offers up to 4% cash back on select categories. To determine if a card is worth its fee, calculate your potential annual rewards based on your spending habits and subtract the annual fee. A positive result indicates the card could be a good fit.

Welcome Bonuses: A Quick Boost

Credit card issuers often use welcome bonuses to attract new customers. These can be substantial – the TD Aeroplan Visa Infinite Card has offered up to 50,000 Aeroplan points as a welcome bonus in the past. However, these bonuses usually come with spending requirements. You might need to spend $1,000 in the first three months to qualify for the bonus.

While these bonuses can be tempting, it’s important not to overspend just to meet the requirements. Always consider your regular spending habits and budget when evaluating welcome offers.

Maximizing Your Rewards

To get the most out of your credit card rewards, choose a card that aligns with your spending patterns. Be strategic about earning and redeeming rewards. This approach can turn your everyday purchases into valuable perks. In the next section, we’ll explore specific strategies to maximize these benefits and make your credit card work harder for you.

How to Maximize Your Credit Card Rewards

Choose the Right Card for Your Spending Habits

The first step to maximize rewards is to select the appropriate card. Analyze your spending patterns over the past few months. If you spend heavily on groceries, consider a card like the Blue Cash Preferred® Card from American Express or Citi Custom Cash® Card, which offer cash back on grocery purchases. For frequent travelers, the TD Aeroplan Visa Infinite Card might be more suitable, offering Aeroplan points on every purchase.

Don’t select a card based solely on its welcome bonus. While these can be attractive, focus on the long-term earning potential. A card that aligns with your regular spending habits will yield more rewards over time.

Use Multiple Cards Strategically

Using multiple cards can significantly boost your rewards. For instance, you could use the BMO CashBack Mastercard for its cash back on groceries, and the Tangerine Money-Back Credit Card for its cash back on two other categories of your choice. This strategy (known as card stacking) allows you to maximize rewards across different spending categories.

However, be cautious not to open too many credit cards at once. Each new credit application can temporarily lower your credit score. Try to space out new card applications by at least six months.

Take Advantage of Bonus Categories and Limited-Time Offers

Many cards offer bonus categories where you can earn extra rewards. The American Express Cobalt Card, for example, offers 5x the points on eats and drinks, which can be even more valuable when used for restaurants and groceries outside of Canada despite the 2.5% foreign exchange rate. Keep track of these categories and use the appropriate card for each purchase.

Additionally, watch out for limited-time offers. Credit card issuers often run promotions where you can earn extra points or cash back for a specific period. The CIBC Dividend Visa Infinite Card, for instance, has offered up to 10% cash back on all purchases for the first four statements in the past.

Avoid Interest Charges

Interest charges can quickly negate any rewards you’ve earned. With interest rates often exceeding 20%, carrying a balance can be costly.

To maximize your rewards, pay your balance in full each month. Set up automatic payments to ensure you never miss a due date. If you struggle to pay off your balance, consider using a low-interest card for everyday spending instead of a rewards card.

The goal is to earn rewards on money you would spend anyway, not to increase your spending for the sake of rewards. These strategies can help you make your credit cards work harder for you, turning everyday purchases into valuable rewards.

Final Thoughts

Credit cards offer rewards that can enhance your financial experience. These incentives range from cash back and travel points to store-specific perks and lifestyle rewards. You can maximize benefits by understanding how reward systems work, earning points on purchases, and redeeming them wisely.

The key to success with credit card rewards lies in aligning your card choice with spending patterns. Use multiple cards strategically and take advantage of bonus categories without overspending. The true value of rewards comes from using them on purchases you would make anyway.

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