It's not all fun and games with those credit card loyalty programs.
Okay, mostly they are about converting the spending you do on your credit card into reward trips, gift certificates and merchandise. But it turns out there are people who prefer to use points for practical financial purposes, specifically to pay down their mortgages or save for retirement.
Royal Bank of Canada has since 2003 allowed clients to parlay their reward points earned on its credit cards into contributions to registered retirement savings plans and registered education savings plans. Now, encouraged by the level of interest in these rewards, RBC is allowing points to be used to pay down mortgages, loans and lines of credit.
"Travel is by far and away the most popular kind of reward," said Andrew Mitchell, vice-president of RBC Rewards and Partnerships. "But there's a constituency that values financial rewards."
All right, it's a small one. Just 15 per cent of the RBC rewards points that are used on merchandise and gift certificates flow into financial rewards, according to Mr. Mitchell. But these people are onto something, as are Bank of Nova Scotia cardholders who are using their rewards for financial purposes and the Vancouver City Savings Credit Union clients who do likewise.
At first glance, turning points into financial rewards sounds like a bad deal. At Scotiabank, you need 12,500 points for a $100 credit voucher (usable on debts, not savings) while RBC requires 12,000 points for the same amount. For context, it's worth noting that you can get a short-haul reward flight for 15,000 points on several different credit cards, and that the value of the flight could easily be in the $200-$400 range.
But there's more to this analysis than just these surface numbers. By paying down your debts with reward points, you can lighten interest costs a bit. And by contributing to an RRSP or RESP, you have the opportunity to put your money to work in a way that magnifies gains considerably over time.
Let's say you turn 12,000 RBC rewards points into a $100 contribution to your child's RESP and that your child has 15 years until he or she needs the money. With an estimated 7-per-cent rate of return, that $100 would grow to $276. Or, maybe you make a $100 contribution to your RRSP and let it compound at 7 per cent annually for 20 years. Here, your money grows to $387.
On the debt side, you get a little less bang for your reward bucks. If you had a $200,000 mortgage with an estimated 6-per-cent rate over a 20-year amortization, then paying down your outstanding principal by $100 would save you $61 in interest. Your total benefit, then, would amount to $161.
The benefit of financial rewards is magnified with debts where the interest rate is higher than for mortgages, like personal loans and unsecured credit lines. It's even bigger if you're a Scotiabank customer who uses reward points to pay down the balance on a Visa card, where interest rates can be as high as 19.5 per cent.
Financial rewards at both RBC and Scotiabank come in the form of a voucher obtained through their respective redemption centres. Scotiabank warns on its website that there's an expiry date listed on the front of each voucher, and it requires you redeem a minimum of two $100 vouchers at a time, which means you need 25,000 points. RBC offers a bit more flexibility in letting you build on the 12,000-point minimum for financial rewards in increments of 3,000 points. For example, you could parlay 18,000 points into a voucher for $150.
Lest you think RBC is getting all serious with the introduction of extra financial rewards, it's worth noting it has a bunch of other new options very much in keeping with the fun and games theme. Example: more than 20 new "RBC experiences" that include skydiving, wine tasting and spa treatments.
Financial rewards seem painfully square by comparison, but they're a good use of your points. Think of them as the reward that keeps on rewarding by saving you interest on your debts or by compounding yearly in your registered accounts.
CREDIT CARD NATION
Canadians own fewer credit cards than Americans on average, but we use our cards more often and are more diligent about paying our card debts, says the London-based firm Lafferty Group. A typical Canadian adult has 2.7 cards on average and uses each of them three times per month. Americans own about twice as many cards on average and use them less than twice per month. Lafferty says Canadians are regarded as more conservative in that they roll over about 50 per cent of their outstanding balances each month, compared to about 75 per cent in the U.S.
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By the numbers
$12,000: minimum amount you need to spend on an RBC Visa card to generate a financial reward (at one point per dollar spent)
$100: amount of the credit voucher you can buy with 12,000 points built up on your RBC Visa
4: financial reward options at RBC, including contributions to registered plans (RRSPs and RESPs) and payments toward balances on mortgages, loans and credit lines
$542.74: Amount a $100 RRSP contribution would be worth in 25 years with average growth of 7 per cent annually
$551.81: Amount a $200 RESP contribution would be worth after 15 years with average growth of 7 per cent.
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Rob Carrick