A free flight gets expensive fast if you bought $2,000 of stuff you didn’t need to earn it. Credit card rewards are designed to make spending feel productive. Points pile up, airport lounges beckon, and a welcome bonus sits just one spending threshold away.
The calculation is simple. If you wouldn’t have made the purchase without the reward, the reward probably didn’t save you money. That makes premium cards worth checking for something beyond their annual fee.
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Count the real cost
The Financial Consumer Agency of Canada recommends comparing the rewards and benefits you expect to use against annual fees and other costs. I’d go one step further and check what you spent to earn them. Suppose a card effectively returns 2% in rewards.
| EXTRA SPENDING | REWARDS AT 2% | MONEY SPENT AFTER REWARD |
|---|---|---|
| $100 | $2 | $98 |
| $500 | $10 | $490 |
| $1,000 | $20 | $980 |
| $2,000 | $40 | $1,960 |
Spending an extra $500 doesn’t earn you $10. It costs you $490 after the reward. Welcome bonuses can make this harder to spot because the prizes are larger.
Toronto-Dominion Bank‘s (TSX: TD) Aeroplan Visa Infinite Privilege card currently offers up to 100,000 Aeroplan points. Reaching the full bonus requires $24,000 of spending within the first 12 months.
If $24,000 already matches your normal spending, great. If you’re booking another weekend away because the bonus deadline is approaching, Aeroplan may be winning this arrangement.
Perks need a purpose
The same rule applies to benefits. TD’s premium Aeroplan card includes Maple Leaf Lounge access, checked-bag benefits, and a NEXUS statement credit. TD estimates the total first-year offer could reach $3,300 in value, depending on how the benefits and points are used.
Yet the annual fee is $599. Someone travelling frequently with Air Canada could extract significant value. Someone taking one flight a year may be paying hundreds of dollars for benefits that look excellent on a comparison page and remain untouched in real life.
Carrying a balance makes the economics worse. The card currently charges 22% interest on purchases. Points aren’t exactly defeating that. So before chasing another reward, I’d use a budget or spending plan and ask whether the purchase existed before the promotion did.
Follow the spending
There’s another side to this behaviour. Banks want their card at the top of your wallet because every purchase can strengthen the customer relationship and generate revenue. That’s why TD interests me.
TD is Canada’s largest credit card issuer, according to my master analyst research. It also has a large Canadian retail franchise spanning chequing accounts, mortgages, investments, insurance, and wealth management. A credit card can become the front door to all of it.
TD’s third-quarter results showed how valuable those customer relationships can be. Adjusted earnings per share (EPS) increased 26% year over year to $2.77. Canadian Personal and Commercial Banking produced record revenue of $5.5 billion, up 5%, while net income increased 7% to $2.1 billion. The bank also reported higher U.S. revenue partly because of its strategic card-platform conversion.
Considerations
TD’s turnaround is progressing, but the stock has run higher. At $169 at writing, shares trade around 16 times forward earnings and sit close to their 52-week high. The quarterly dividend is $1.12, or $4.48 annualized, producing a yield near 2.7%.
Investors looking at Canadian dividend stocks also need to remember TD’s largest unresolved issue. Its U.S. business remains constrained by an asset cap imposed after its anti-money-laundering failures.
TD’s Canadian franchise remains the stronger part of the business, while deeper customer relationships remain central to improving U.S. returns.
Bottom line
Credit card rewards work best when they reward spending you were already going to do. If a perk changes what you buy, how much you spend, or how often you travel, calculate the cost before celebrating the points.
Banks understand how powerful those incentives can be. That’s one reason TD wants more customers reaching for its cards. As an investor, I like the revenue opportunity. As a cardholder, I’d make the bank work harder for my money.
