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If you’re sitting on a huge amount of credit-card reward points, give some thought to using them up in 2023.

The longer you stockpile your points, the more risk there is that today’s challenging conditions in the credit-card business start to affect reward programs for the worse. The list of steps card issuers could take to help their profitability include adding expiry dates for points and making the terms for redemptions of travel or merchandise less favourable.

If you have a card with a strong points-earning rate, make maximum use of it within responsible spending limits. There is a long-standing pattern of outstanding card rewards being ratcheted down at some point.

Stay vigilant as a points collector because the underlying business conditions for credit-card issuers are deteriorating. We’re in a golden age of credit-card rewards – so many choices for earning a pile of cash back and travel rewards. Can it continue in tough economic times?

For one thing, credit cards seem to be losing some of their dominance as a preferred way to pay for things. The market research consultancy MarketSense Inc. does an annual survey in which participants are asked about their preferred way to pay for things. In 2011, 43 per cent chose credit cards, 40 per cent chose debit and 20 per cent went with cash.

Credit cards accounted for 59 per cent in 2021, then dropped back to 55 per cent last year. It’s the first decline for credit cards in the 11 years that the survey has measured payment preferences. “Clearly, this is being driven by the rising costs of living,” MarketSense’s Lynda Lovett said by e-mail.

Debit was the main beneficiary of changing payment preferences, which is good to see from a personal-finance perspective. Debit is a pay-as-you-go proposition, which means you’re spending within your means. By providing a means to immediate spending gratification with payment potentially delayed for weeks, credit cards practically invite you to spend more than you can afford.

While people expressed less of a preference for credit cards, they’re actually using them a lot these days. Credit cards became this country’s preferred way to pay for purchases by offering rewards that can be redeemed for travel and merchandise, or cash back. But a surge in card issuance and usage recently suggests a new driver for this line of business – households that need access to a handy, no-questions-asked way to cover financial shortfalls.

A recent update from the credit-reporting company Equifax Canada shows that average payments for people who carry a balance were lower in the third quarter of 2022 than a year earlier, while the average monthly level of spending by cardholders jumped almost 22 per cent over prepandemic levels to $2,447. Almost 1.5 million new credit cards were issued in the quarter, up 6.2 per cent from the same time in the prepandemic days of 2019.

The economic backdrop to this trend, high inflation and borrowing costs, brings us to another challenge for the credit-card business today. More than ever before, we are being exposed to the heavy cost of providing travel rewards and cash back to credit-card users.

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Banks charge fees to businesses for processing customer card payments and, in a slowing economy, these fees are more of a burden than usual. Businesses are now allowed to pass these costs on to customers, but we haven’t seen this kind of surcharging take hold as a trend. If this happens, you can expect card usage to decline.

Meantime, the growing number of people who can’t pay what they owe on their card in full every month are exposed to interest rates of around 13 per cent for low-rate cards, up to the usual 20 per cent. Expect card defaults to increase sharply as a result.

Credit-card issuers are asking for reputational annihilation if they raise their interest rates to compensate for higher losses and lower usage levels. Two more likely possibilities are higher fees of various types, and reductions in the utility or value of points.

The credit-card business will improve as the economy turns around, but a tough year or two lies ahead. A credit-card strategy for these times: Watch your monthly statements for notifications of changes to your card, and consider using points now rather than letting them accumulate indefinitely. Can your rewards help you with the cost of summer travel plans, or this month’s groceries?

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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