Can credit cards actually boost your savings? Yes, but dangers lurk

As the March 1 Registered Retirement Savings Plan deadline nears, do you find yourself scrambling for a few extra dollars to put toward your contribution amount? Well, if you own a credit card that accumulates points, you might be able to redeem those points for vouchers that can be deposited into an RRSP, Tax-Free Savings Account or Registered Education Savings Plan.

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Chad Viminitz, a certified financial planner with RTR Advisory Group in Edmonton, Alberta, and author of "Money Assassins," offers his take on the advantages and disadvantages of using your credit card points to catch up on savings contributions.

What are the benefits of redeeming credit card points for RRSPs?
The benefit is increasing or starting your savings for retirement or your child's education. In some cases, it might even help individuals get started on their savings.

Is it smarter to use these points for RRSPs or TFSAs -- or some other type of savings fund?
There's no black-and-white answer, and it really depends on one's financial situation; but my bias, if one needs to generalize, is towards the RRSP. One big reason: A RRSP is harder to get at; whereas people tend to access a TFSA more frequently than a RRSP. RRSP contributions also have a higher likelihood of being there in the future than a TFSA deposit.

Is there a danger in spending more simply to earn extra points?
There are many dangers behind the fine print. The main concern I have with all these types of programs is that they encourage the use of plastic as the primary payment method. Studies have shown that individuals will spend approximately 20 percent more when they use a credit card compared to cash. But the effective rate you are getting back on your points for RRSP redemption is just under one percent. You do the math. 

Furthermore, merchants right now are fighting the credit card companies on increased fees that are being passed onto consumers, so the public needs to realize that they are actually paying twice for the fee being deposited into their RRSP. First, from the extra transaction fee that is being passed on and secondly, with the additional spending that occurs when one uses plastic as a payment method.

What do you see as the drawbacks of using points towards an RRSP?
Tied selling! You have to redeem your points at the credit card's financial institution. Banks know that once they get some information on you, the more leverage they have. The biggest drawback is that you have spent more money using plastic than you are receiving back. 

Of course, if you have points that you're not going to use, it's better to use that spending to increase your savings rather than simply buying something you don't need. But do not use credit cards in hopes of saving for your retirement; it's a losing proposition.

See related: Pay off debt or save for retirement?; Got extra cash? Is it better to save it or pay down credit card debt? 

Published February 28, 2011

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