Loyalty programs can earn you rewards for just about anything, including movies, travel, hockey discounts and grocery store savings. Some even deposit cash right back into your pocket. However, while rewards programs can be beneficial, they can also lead to unnecessary spending that you can't pay back -- and what happens to your points then?
The emotional appeal of "beating the system" to get something for free can blind consumers to the net costs and benefits of rewards cards. Most rewards programs earn you only 1 to 2 per cent in rewards for each dollar spent. Meanwhile, many rewards cards come with fees or higher interest rates than non-rewards cards.
According to a March 2015 report by the Loyalty Marketers' Association, the average consumer belongs to 13.3 different loyalty programs, an increase from 10.9 programs in 2014, leaving a lot of opportunity for overspending to get rewards.
"Consumers may not get the best value for their money as they focus on the rewards and not the costs they have incurred or determined if the money spent was for a need vs. a want," Scott Hannah, president and CEO of Credit Counselling Society, said in an emailed response to questions. "Consumers should take the time to determine which loyalty/rewards program is right for them and then take the time to read and fully understand the cardholder agreement and rewards program."
If you haven't done that and now you're facing default, you're likely wondering: what will happen to my hard-earned points?
may be able to salvage them - but not always
Michael Hanson, senior vice-president for the Kitchener office of BDO, one of North America's largest accounting, tax and advisory firms, says the fate of your rewards depends on the terms of the card.
"Most card agreements require the card to be kept in good standing in order to use the accumulated points," Hanson says. The definition of "good standing" can vary by financial institution, he says, but generally it means you're making at least the minimum payment, and you're making it on time.
Hannah said when you default on a rewards credit card, the rewards are suspended in the short term and you will not be able to access them until the card is brought up to date again. "Some credit cards that are co-branded and have travel reward programs release the travel points earned in a billing cycle once the customer is paid up for the current billing period," said Hannah.
For example, the Bank of Montreal offers an Air Miles MasterCard that credits miles earned to your Air Miles account as long as the account is in good standing. Miles earned each month typically go into the account within two business days of the statement. If you default, you will lose the points that would have been credited in the next statement cycle, but you cannot lose points that have already been transferred to your Air Miles account.
In the case of a credit card with a built-in loyalty points program, such as Sears of PC Financial, if you default on the card, you forfeit any rewards you have not yet spent, since the program is directly tied to the card.
But suspension of points is not your only concern if you're not paying your bill. "Some credit card companies will cancel a card if it is one to two payments in arrears; others will allow three to four," Hanson says. "Generally speaking, once a card has been cancelled, any benefits that were accrued by the card are also cancelled."
If your situation escalates to the point of bankruptcy, any accumulated points -- whether they're in a credit card rewards account or a frequent flier account -- could be considered an asset of your estate. This is especially true if there are a significant amount of points.
It might seem like a good idea to cash in your reward points before they're taken away, but doing this can backfire. If you're having a financial emergency, it's better to let your issuer know the situation. Most issuers will be willing to work with you. However, clearing out your points balance can send a red flag that you may not be telling the whole story. If you're on the verge of bankruptcy, you're even less likely to get away with it.
"There have been a couple of instances where cardholders cashed in their travel rewards and converted them to gift certificates just prior to declaring bankruptcy," Hanson says. "Since the card issuers are aware of account activity, they notified the trustee, who then seized them. While a nominal amount, it could be seen as intentionally disposing of assets to keep them from creditors."