According to canadaloyalty.com, the average Canadian consumer carries six different loyalty cards in the hopes of saving money or getting free stuff.
The purpose of a loyalty program is to persuade you to change your buying behaviour – consume more than you would in the absence of a program, and ideally from the same vendor.
It’s tempting to turn ordinary purchases of groceries, fuel or shoes into something of value – free hotels and flights. However, these programs can be complex and may trick a savvy buyer into overbuying and overspending. Everyone loves free rewards, but not at the expense of your financial plan.
It only makes sense to join a loyalty program if you’re already a loyal shopper, thus it’s meaningful and you earn rewards for purchases you’d otherwise have made. For most Canadians, this means accumulating credit card or airline points. But there are other programs; if you’re a coffee buyer, collect stamps so your tenth coffee is free. Join the discount club at the grocery store or a “bulk buying” warehouse membership program.
I recommend avoiding rewards programs you don’t plan to redeem within a short time frame (five years or less). This is because the longer you wait, the more likely it is the point system will change and adjust to the increasing cost of providing the rewards. Because rewards programs are a ‘privilege’ and not a right, providers commonly change the rules at the expense of consumers’ rewards. If you don’t keep up with purchases or payments, your points can disappear. Just last year, the points I needed to redeem for short-haul air travel increased by 25 per cent. So, my points became less powerful over time. Redeeming ‘free’ points can also result in you having to pay taxes, surcharges and fees.
A July 2009 study from the University of Toronto and an economist at the Federal Reserve Bank of Kansas City found that people would accrue less credit-card debt if card companies were barred from offering rewards based on the value of purchases.
It’s foolish to spend an unplanned $1,000 just to collect points which, when layered with another $25,000 in pointed purchases, can be converted into a golf clubs twelve years down the road. If you catch yourself justifying your purchase as a ‘good deal’ because of the loyalty program, reconsider buying.
Rewards shouldn’t drive your purchase decisions. Good financial planning should; have only one or two credit cards and avoid carrying a balance (you only earn points for new purchases, not for carrying a balance). Can you afford it? Does the purchase help build your net worth (buy assets and avoid debt)? If it doesn’t, think again.
