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MONEY MILESTONES: In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.
Credit cards can be a fickle beast. They may seem like the solution to your troubles when you can’t afford groceries this month, but forget to pay them down, and they suddenly turn into some serious debt, particularly for millennials who many already be carrying several other types of debt.
This generation has already gone through a lot. But now they’re trying to buy a home, which means a lengthy mortgage, even though they may still be carrying student debt — $28,000 on average for Canadians with a bachelor’s degree, according to Statistics Canada as of 2015. Never mind opening a line of credit to help pay for starting a new family in many cases.
That’s why it’s important young Canadians know exactly what they’re getting into when using a credit card. But it isn’t a reason to go without one, said Julia Miller, spokesperson, Payments, Credit and Banking at Royal Bank of Canada, especially if a credit card has a rewards program that can cover a range of needs from paying bills to aspirational travel
“Clients can pay down their credit card balance with points, pay for purchases in-store, pay their bills, send an e-transfer to a friend, convert points to a wide variety of partner loyalty programs or donate them to a charity of your choice,” she said.
It’s these services that help people manage their finances before they go into more debt. In that sense, credit card reward programs can be used as a tool to both build credit and stay on top of their daily needs by using the rewards.
For example, PC Optimum, one of Canada’s most popular rewards programs, has turned into a budgeting tool for many. PC Optimum recently partnered with Esso, so people can pay for everything from groceries to gas with points, said Barry Columb, president of President’s Choice Financial.
“We partnered with Esso to bring redemption from our stores to the pumps at a time when gas prices are demanding an even greater share of Canadians’ wallets,” Columb said. “In late 2020, we launched the PC Money Account, an account that allows customers to pay with their own money and still collect the points they depend on.”
Every bank is different, as is every card, since each offers different rewards and methods of payment. That’s why it’s important to do your research before deciding, especially if you’re using your credit card specifically for the rewards.
Searching for credit cards that can help you pay off items that you use on a regular basis can be a good place to start, said Premal Brahmbhatt, an assistant branch manager at the Bank of Nova Scotia in Toronto.
“If you are doing certain transactions as part of your daily routine, such as taking transit, ordering food with SkipTheDishes, going to movies, you can utilize credit cards that will earn you loyalty benefits that can be redeemed at several retail partners,” Brahmbhatt said. “Take advantage of rewards if it naturally complements your lifestyle, but don’t use credit cards in order to earn more rewards if it means accumulating more debt.”
More debt is certainly something Canadians don’t need. That’s why another consideration is to use credit card rewards to help pay down larger debts you already have, such as student debt and mortgages. But not every bank offers this, Miller said.
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“Clients can use (RBC Rewards) points to enhance their financial well-being such as using points to pay down loans, mortgages, credit cards or contributing towards investments in retirement and education,” Miller said. “RBC, as well as other financial institutions, also offer low-rate credit cards for clients who are looking to save on interest charges.”
Using credit card rewards can be a beneficial tool in reducing debt and managing finances, but it’s just that: a tool, one of many people can use to pay down their debts.
Brahmbhatt noted a few other ways to reduce debt are to cut back on automated charges, especially subscriptions. People should also review their charges on a regular basis to see where they can reduce spending. Furthermore, they should focus on reducing high-interest debt first, followed by larger debts such as student loans and mortgages.
But if Canadians are serious about reducing debt, Miller said the best line of defence is to meet with a financial adviser.
“Creating debt in general is something that concerns many Canadians,” she said. “Having the right advice and support can go a long way in helping people effectively manage their money, including paying down debt.”