Lesson 7.1 – Understanding Reward Programs

Introduction

Credit card reward programs are one of the biggest incentives for using a credit card, but they can be confusing. There are multiple types of rewards, each with different benefits and best-use cases. Understanding how these programs work can help you maximize value without overspending.

Types of Credit Card Rewards

There are three primary types of credit card rewards:

1. Cashback Rewards

• Earn a percentage of your spending back in cash (e.g., 1%–5% cashback).
• Typically redeemed as statement credits, direct deposits, or gift cards.
• Best for those who prefer simplicity and immediate savings.

Pros:
Easy to understand and redeem.
No complicated transfer partners or redemption restrictions.
Helps reduce your credit card balance.

Cons:
✘ Typically lower earning potential compared to points/miles.
✘ No premium redemption options like luxury travel.

Example:
If you have a 2% cashback card and spend $1,000/month, you’ll earn $240/year just by using your credit card instead of cash or debit.

2. Points-Based Rewards

• Earn points that can be redeemed for travel, merchandise, gift cards, or cashback.
• The value of points varies based on the program (e.g., 1 point = 1 cent, or even 2+ cents when used strategically).

Pros:
Potentially higher value than cashback when redeemed wisely.
Often come with large welcome bonuses.
Flexible redemption options for travel, hotels, and even experiences.

Cons:
✘ Can be complicated to redeem optimally.
✘ Some points expire if not used within a certain timeframe.
✘ Redemption values vary, meaning some options provide poor value.

Example:
Let’s say you have an RBC Avion Visa Infinite that earns 1 Avion point per $1 spent. You can redeem:

• 100,000 points = $1,000 in travel (1 cent per point).
• 100,000 points = $500 worth of gift cards (0.5 cents per point – not a great redemption).

Tip: Transferable points (like American Express Membership Rewards or RBC Avion) are more valuable than fixed points, as they can be transferred to airlines and hotels for better value.

3. Travel Miles & Airline-Specific Rewards

• Earn frequent flyer miles or hotel points instead of generic credit card points.
• Can be transferred to airline/hotel partners for maximum value.
• Best for frequent travelers looking to redeem for flights, hotels, upgrades, and experiences.

Pros:
Typically higher redemption value (especially for business/first-class flights).
Offers access to exclusive travel perks like lounge access, upgrades, and priority boarding.
Some programs have dynamic pricing, allowing flexibility in redemptions.

Cons:
✘ Complicated redemption systems (availability, blackout dates, varying point values).
✘ Points can devalue over time if the program changes its rules.
✘ Not ideal for people who don’t travel often.

Example:
A TD Aeroplan Visa Infinite earns 1 Aeroplan point per $1 spent.

• 25,000 Aeroplan points = One-way economy flight from Toronto to Vancouver (~$400 value).
• 60,000+ Aeroplan points = Round-trip business class from Toronto to Europe (~$3,000+ value).

Tip: If you don’t travel much, avoid travel-specific credit cards. Cashback or general points-based cards may be a better fit for your needs.

Comparing the Three Reward Types

Key Takeaways

Cashback is best for simplicity and consistent savings.
Points-based rewards offer flexibility but require research for best value.
Travel miles provide the highest value but are best for frequent travelers.