For years, my wife and I have had a joint Aeroplan credit card. And, for much of that time, it seemed like a great perk. She was travelling a lot for work and we put as much as we could from our daily purchases on credit (always paying off the balance in full) so, very quickly, the points started to add up. In fact, we once built up enough points to travel to southeast Asia in business class.
But, recently, we’ve been frustrated a few times when trying to use our points to book travel with our two kids, ranging from being restricted to very inconvenient flight times and layovers, to taxes and fees adding up to almost as much as it would cost if we simply bought the flights on a discount airline. So we’ve started to think we may be better off with a cash-back credit card. Here’s what we found out.
How do they work?
Simply put, every time you use a cash-back credit card, a small percentage of your total bill will be paid back to you. The no-fee MBNA Smart Cash MasterCard for example, offers an introductory bonus rate of 5% cash back on gas or grocery purchases for the first sixth months – the rate drops to 3% after that – and a 1% rebate on all other purchases.
Other cards have varying rates that are tiered, increasing the rate paid out the higher your annual spending. With the CIBC 1% Dividend Visa, for example, you will get 0.25% on the first $1,500 in purchases, 0.5% on the next $1,500, and a full 1% on everything after your first $3,000 spent each year.
Still others are tied to specific retailers and offer higher rates on purchases at those stores. The Canadian Tire Cash Advantage MasterCard’s top 1.5% cash back rate jumps to 3% for purchases as the company’s stores, gas bars, or at sister company Mark’s Work Wearhouse.
The payout plans also vary. The MBNA MasterCard issues a cheque as soon as your cash back balance reaches $50. Others make a one-time annual payment.
Like anything, you really need to shop around to find out which card would work best for your personal spending habits. But when comparing credit cards, also keep in mind that many of these cards also offer other incentives, like travel insurance, discounts at select car rental companies, or built-in extended warranties that may in the long run be worth more to you than an incrementally higher interest rate.
So, how much will I get?
Using the MBNA Smart Cash card as an example, and assuming that gas and groceries account for 25% of your monthly purchases, here are a couple different scenarios to consider.
1) You spend $1,000 a month on credit card purchases (so $12,000 a year).
- In the first six months of having the card, you’re going to get 5% cash back on your gas and grocery purchases: $250/month x 6 months x 5% = $75
- For the last six months of the year you’ll earn 3% on gas and groceries = $45
- And for the entire year, you’ll earn 1% on the remaining $750/month x 12 months = $90
- For a grand total of $210 for the year.
2) You’re a big spender, putting an average of $8,000 a month on your credit card (or $96,000 a year).
- Six months’ worth of gas and groceries ($2,000 x 6) at 5% will earn you $600.
- The next six months at 3% earns $360.
- And 12 months of other purchases at 1% earns $720.
Meaning that Mr. (or Ms.) Big Spender will get $1,680 back in rebate cheques over the course of the year. Not a huge amount when compared to the total overall spending, but still almost enough to cover a months’ worth of gas and groceries.
For us, our monthly credit card bills fall somewhere in between. For now, I think we’ll hold onto the Aeroplan card and hope the kids can cope with the odd layover.
Writer for RateSupermarket.ca