Many credit cards market travel as the star of the points show, but financial redemptions are where the quiet, compounding value lives, writes Barry Choi.Ryan Remiorz/The Canadian Press
Everyone loves booking travel with points, but the redemptions no one brags about are actually often worth far more.
Using your points to cut your statement balance, pay down your mortgage, or boost your registered retirement savings plan, or RRSP, can deliver a return that’s five to 10 times higher than a cheaper flight or discounted hotel.
This isn’t hypothetical. Programs such as RBC Avion, BMO Rewards, CIBC Aventura and National Bank À la carte Rewards, market travel as the star of the points show, but the financial redemptions are where the quiet, compounding value lives.
At first glance, travel redemptions seem like the obvious winner. Most programs let you redeem 100 points for one dollar in travel (BMO Rewards is 150 points for $1), and some even offer fixed‑price flight charts where your points can double in value depending on the fare. On paper, that means your points can be worth one to two cents each when you use them for flights or hotels.
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However, every program allows you to use your points for a statement credit, which reduces the amount you owe each month. At face value, this financial redemption is a huge devaluation compared to travel, but it can have a significant advantage in specific situations.
For instance, with the Tangerine Rewards World Elite Mastercard and Scotiabank Passport Visa Infinite Card, both of which earn Scene+ points. With either card, 1,000 points gives you $10 off, for example, groceries or merchandise at Empire-owned stores (Sobeys, FreshCo, IGA, Foodland, Safeway) or against travel purchases charged to your card. That’s a cost per point, or CPP, value of one cent.
Now here’s what would happen if you put your points toward a statement credit. Tangerine allows you to redeem 150 points for one dollar off your statement, while Scotiabank cardholders can redeem 3,000 points to get $20 off, or 14,500 points for $100. It knocks down your bill right away, but the value drops to 0.67-0.69 cents a point. That’s basically a 30-per-cent downgrade.
On the surface, it’s worth more to use your points immediately on groceries or to save them for that next big trip. But those same cards charge purchase interest rates of 20.95 per cent and 20.99 per cent, respectively.
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If you’re carrying a balance and paying interest charges, holding on to your points just doesn’t add up. A statement credit gives you an immediate, far higher return than any travel redemption ever will – we’re talking 20 times the value of a 1-per-cent travel redemption.
If you never carry a balance and always pay your bill in full, a statement credit isn’t worth it since travel and groceries deliver better value. But that doesn’t mean you should dismiss financial redemptions entirely.
Standard travel redemptions with RBC Avion give you the usual 1 CPP. For 3,000 Avion points, you can get a $25 voucher – a CPP of 0.83 – that can be redeemed for financial rewards through RBC. This is another significant devaluation compared to travel rewards, but if you’re willing to play the long game, you’re going to come out ahead.
Financial rewards apply to eligible registered products and other lending and/or investing products with RBC, such as your RRSP, registered education savings plans, tax-free savings accounts – or TFSA – personal RBC mortgages, and more.
Let’s say you earn about 60,000 Avion points a year. Used for travel, that’s $600 in value. But if you redirected those points into a TFSA – at a value of $500 as a financial reward – for 10 years and earned 6 per cent annually on your investments, you’d end up with $7,485.82 in savings instead of a cumulative $6,000 in travel. Stretch that to 20 years, and the gap gets even wider: $19,996.36 in your TFSA versus $12,000 in redeemable travel.
The difference is amplified even more with RRSP contributions. Someone with a marginal tax rate of 25 per cent would get a $125 tax refund from redeeming those same 60,000 points to top up their RRSP. If they continued to use their points for retirement savings and reinvested the annual refund into their RRSP over the next 30 years, they’d end up with $53,001 in retirement savings, compared to just $18,000 in travel value.
Of course, everyone’s tax situation varies, refunds aren’t a sure thing, and the return on your investments can fluctuate, but you get the point.
There’s no denying travel redemptions help you stretch your vacation budget further. But over the long haul, financial redemptions almost always come out ahead.
Barry Choi is a personal finance and travel expert at moneywehave.com. He was previously affiliated with RBC, BMO, CIBC, Tangerine, Mastercard and Scotiabank but currently has no relationship with any of the brands.
