points vs interest

Points vs interest

Points vs interest

Recently I have been giving it some thought on the various points you earn on credit cards; from cash back to travel rewards and everything in between. There are significant welcome rewards on many credit cards and bonus rewards as well! As consumers we are always looking to maximize the points we earn. I asked myself the question: is you get points when you buy something, what do you get when you save? It’s interest of course, but why aren’t we as concerned with earning interest by saving versus earning points by spending and going into debt? Today’s new debate is points vs interest.

points vs interest

Points

Points are great; you can earn cash back, travel points, points to spend on entertainment purchases and points can be redeemed for merchandise and groceries! The points you earn range anywhere from 1% of what you spend to upwards of 4%-5%! The welcome points range as well from 5,000 to upwards of 50,000 which is the value of a short haul domestic flight in many cases. With enough points saved you can redeem them for nearly whatever you want. We have all heard of people using points to pay for an entire two week family vacation.

Points can also be converted with many credit cards; you can transfer points to frequent flyer programs such as Air Miles or Aeroplan or to Starwood Preferred Guest loyalty program.

There are many options of what you can do with your points and depending on where you make your purchases the rate you accumulate points can vary significantly.

Interest

Unlike points, interest is earned by saving money. Interest is earned no matter how small or large of an amount you save or how you save it. There are generally no welcome interest. However there may be bonus interest on new deposits, usually around 3% which is a great savings rate. Current high interest savings accounts (aka HISA) are around 1% which is the same rate as the lower end of which you earn points. Some are as high as 2% however the rates are earned from non-Chartered Banks.

With no welcome interest nor any significant savings interest rate earning points appears to be the better option. However there is one substantial benefit to interest that points will never have… that is compound interest! With compound interest your interest earns interest whereas with points, your points do not.

Which is best

If you can earn the points you want and earn interest on the money you save you are winning on both accounts. What is harmful with points it requires you to spend money and go into debt. Larger purchases earn you more points and can put you into even more debt.

Here are some things to consider before making a large purchase:

  1. Is this a purchase you would make anyway regardless of the number of points you can earn?
  2. Will you have enough money to pay the purchase off?

When looking to earn interest here are a few considerations:

  1. Pay yourself first. Transfer a certain amount into a high interest rate savings account every month.
  2. Consider switching banks to earn a higher interest rate. History has shown that banks that offer the highest interest rate do so for only so long.

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