The optimal cash back credit card strategy

One of the easiest ways to increase your household revenue is to apply for a cash back credit card.  With dozens of options, it can be hard to understand what single card or combination of cards can maximize this opportunity.  This post intends to uncover what the optimal cash back credit card strategy actually is.

Today I’ll be examining what the best credit card or combination of credit cards are — in my next post I’ll be analyzing how much following this optimal strategy can add to your net worth over time.

Why do I prefer cash back credit cards over other forms of rewards?

  • maximum flexibility in how I spend my rewards — legal tender is as flexible as it gets
  • time value of rewards — in many cases I can immediately redeem the cash and get it working, as opposed to, say, saving points up for a trip that I might take many years from now
  • control over point inflation — dollars inflate with the overall economy, whereas points can be devalued by the issuing company (looking at you Aeroplan) at any time and without warning
  • restricted usage — ever booked a flight with Aeroplan?  Then you know the public availability of partner flights is severely restricted, forcing you to take multiple stops or fly at 6 am when there are much better flights still available.  Not exactly making us feel ‘special’.
  • you can buy flights with dollars, too — using cash allows you to take advantage of flight sales that you would not have access to using some point schemes

I’ve personally been using an MBNA World Elite cash back card as my main credit card for almost a year and have obviously fallen deeply, utterly in love with it.  But I was curious — was this the best card on the market?  Was there another card out there that could best augment it?  First, let’s have a look at the slate of cards I’ll be looking at today:

Features of cash back credit cards in Canada

FeaturesAE SimplyCashAmazon.caMBNA World EliteRogersTangerineScotia Momentum
Base rate1.25%1%2%1.75%1%1%
Special ratenone2% on Amazon.canonenone2% in 3 categories4% in groceries and gas
Annual chargenonenone$89$29 (waived if Rogers customer or if ask nicely)none$99
Net Foreign Exchange-1.25%1%-0.50%1.50%-0.50%-1.50%
CashBackAnnual, applied to balanceAutomatic $20 statement creditsOn demand, transferrable to any account in $50 blocksOn demand in $20 for Rogers products, or annually applied against statementMonthly, to savings or against CC statementAnnual, applied to balance
Bonus Offer5% gas, groceries, restos for first 6 months$20 up front1st year free, $100 up front1st year free, $25 up front4% in chosen categories for 3 months1st year free
Income Required$15,000+$15,000+$70,000 or $120,000 household$15,000+$15,000+$60,000 or $100,000 household
Additional Cardsfree??freefreefree$30

American Express Simply Cash No Fee

Pros: This is the simplest flat-rate no-fee card on the market, offering 1.25% on all purchases and no annual fee to worry about. It includes 5% back on gas, groceries, and restaurants for 6 months.

Cons: 2.5% fee on foreign transactions, only one annual cash back redemption

Amazon.ca Rewards Visa 

Pros: No foreign transaction fee, 2% cash back on Amazon.ca purchases

Cons: pretty low 1% base cash back rate, fairly skimpy $20 bonus offer

MBNA World Elite Mastercard

Pros: best 2% base cash back rate in Canada, immediate deposits to your bank account in $50 blocks, very nice $100 bonus offer

Cons: $89 annual fee that detracts many, one of the highest minimum incomes to qualify at $70,000 or $120,000 for your household, 2.5% charge on foreign transactions

Rogers Platinum Mastercard

Pros: very nice 1.75% base cash back rate, no annual fee if Rogers customer, and 1.5% net cash back on foreign transactions (the best rate in Canada)

Cons: If not a Rogers customer, there’s a $29 annual fee and you can only pull your money out as cash once per year

Tangerine Money-Back Mastercard

Pros: no annual fee, 2% cash back on 2 or three spending categories, slightly better -1.5% charge on foreign transactions than most cards, monthly redemption

Cons: 1% base cash back rate drags on potential, pretty basic bonus offer of 4% cash back in chosen categories for 3 months

Scotia Momentum Visa Infinite

Pros: 4% standard cash back in gas and groceries…. and that’s basically it

Cons: high annual fee of $99, annual redemption, 2.5% foreign transaction fee, 1% base cash back is awful, $30 annual charge for secondary cards, no bonus offer to speak of

Spending Parameters

Before I delve deeper into comparing these cards, you’ll notice that some of them have special spending categories (namely the Tangerine and Momentum) that offer you more cash back for gas, groceries, etc.  To get a sense of what an average Canadian household will actually spend on those categories, I referenced Statistics Canada’s Survey of Household Spending (Table 203-0022).  This particular table breaks down average household spending into 5 household income quintiles, so you can see how a high-earning household spends on various categories versus a lower-income household.

Percent of annual credit card spending on specific categories by household income quintile

Category1st Quintile2nd Quintile3rd Quintile4th Quintile5th Quintile
Food20%19%19%17%15%
Gas6%7%8%8%7%
Restaurants6%7%7%8%8%
Total32%33%34%33%29%

You can see from this table that lower-income households tend to spend more of their “credit card chargeable” expenses on food than higher income households.  Restaurant charges as a % of credit card expenses tend to increase as household income increases, while gas charges follow a parabolic curve, first increasing in the middle-income households and then falling again for the highest-income households.

How do I know what portion of these households’ budgets are “credit card chargeable”?  First I must find the total average household expenses.  Second, I must subtract any expense that CANNOT be charged to a credit card.  As an example, let’s analyze the middle, or 3rd income quintile:

Total average annual household expenses: $67,829

minus: rented living quarters – $3650

minus: mortgage paid – $4275

minus: condo fees – $364

minus: property taxes – $1,808

minus: homeowners insurance – $652

minus: other expenditures for owned living quarters – $473

minus: water, fuel, and electricity for principal accommodation – $2516

minus: owned vacation homes – $395

minus: other owned properties – $379

minus: child care – $296

minus: purchase of automobiles – $3691

minus: fees for leased automobiles – $337

minus: private vehicle insurance – $1187

minus: private health insurance plans – $744

minus: tuition fees – $843

minus: financial services – $683

minus: income taxes – $7888

minus: personal EI and pension payments – $3880

minus: gifts of money, support payments, and charitable donations – $1727

NET chargeable to a credit card: $32,041

So the average third income quintile household will have $32,041 in total expenses that they can charge to a credit card.

I’ve calculated this average for all 5 household income quintiles and then I’ve eyeballed upper and lower bounds to the credit card spending ranges I’ll apply the spending ratios on food, gas, etc I calculated previously:

Spending Ranges1st Quintile2nd Quintile3rd Quintile4th Quintile5th Quintile
Bottom$0$19,000$28,000$36,000$46,000
Average$16,944$23,962$32,041$40,148$57,577
Top$19,000$28,000$36,000$46,000and over

So, for any household charging between $28,000 and $36,000 per year on their credit cards, I’ll be assuming that they spend 19% on food, 8% on gas, and 7% on restaurants, etc.  This will help me rate just how good using the Tangerine or Scotia Momentum cards actually are, since they offer enhanced cash back rates for these categories.

The Tale of the Tape

Now that we’ve got that detail out of the way, let’s analyze each card!  I’ll be assuming that everyone spends 2.5% of their annual credit charges on foreign transactions, that the Rogers card owner is NOT a Rogers customer, and that the Amazon card holder spends 5% of their annual spend on Amazon.  For all tables, I do NOT factor in temporary bonuses or bonus rates, as that muddies the picture of what cards will offer you from year 2 onwards.  The following table shows how each card performs if you used it exclusively at various spending ranges:

Annual cash back from different credit cards at various spending levels

Income QuintileAnnual Credit Card SpendAE SimplyCashAmazon.caMBNA World EliteRogersTangerineScotia Momentum
1st$2,500$30$26-$41$15$32-$56
1st$5,000$59$53$8$58$64-$13
1st$7,500$89$79$56$102$96$30
1st$10,000$119$105$105$145$128$73
1st$12,500$148$131$153$189$160$116
1st$15,000$178$158$202$233$192$159
1st$17,500$208$184$250$276$224$202
2nd$20,000$238$210$299$320$259$245
2nd$22,500$267$236$347$363$291$287
2nd$25,000$297$263$395$407$323$330
2nd$27,500$327$289$444$451$355$373
3rd$30,000$356$315$492$494$391$425
3rd$32,500$386$341$541$538$423$469
3rd$35,000$416$368$589$581$456$513
4th$37,500$445$394$638$625$485$534
4th$40,000$475$420$686$669$517$576
4th$42,500$505$446$734$712$549$618
4th$45,000$534$473$783$756$582$660
5th$47,500$564$499$831$799$595$660
5th$50,000$594$525$880$843$626$700
5th$60,000$713$630$1,074$1,017$752$860
5th$70,000$831$735$1,267$1,192$877$1,019
5th$80,000$950$840$1,461$1,366$1,002$1,179
5th$90,000$1,069$945$1,655$1,540$1,127$1,339

If you spend $5000 per year or less on your credit card, the Tangerine card would be the best for you as its no annual fee trumps the lower 1% base rate.

As your spending increases, between $7,500 and $30,000 per year, the Rogers card becomes the best option, as the lower annual fee of $29 compensates for its lower base cash back rate (1.75% vs 2%) to the MBNA card.

However, if your annual credit card spend is $32,500 or higher, the MBNA’s 2% base rate kicks in and outweighs its higher annual fee.

But this is a slightly simplistic way to look at the issue.  What if I combined cards with different, complementary features (such as one with a high cash back rate and one with no foreign transaction fees)?

Combining Cards

There are three obvious card combinations here:

Combination 1: Rogers + MBNA

In this setup, you use the MBNA card for all of your domestic purchases and the Rogers card for all foreign transactions (assumed at 2.5% of total purchases) to avoid MBNA’s 2.5% foreign transaction fee.  For now, I’ll be assuming you’re not a Rogers customer.

Combination 2: Rogers + Tangerine

In this setup, you’ll be using Tangerine for all purchases of groceries, gas, and restaurants, and then using the Rogers card for all other purchases (including all foreign transactions).  Tangerine’s card is free, so you might as well get the 2% cash back rate on these categories over the 1.75% cash back rate Rogers offers.

Combination 3: MBNA + Amazon

In this setup, you’ll use MBNA for all domestic purchases, and then amazon.ca card for all foreign transactions (and optionally any amazon.ca purchases, which you are indifferent to as the rates are identical at 2%).

Annual cash back from different credit card combos at various spending levels

Income QuintileAnnual Credit Card SpendRogers+MBNARogers+TangerineMBNA+Amazon
1st$2,500-$68$17-$40
1st$5,000-$19$62$10
1st$7,500$31$108$59
1st$10,000$81$153$109
1st$12,500$130$199$158
1st$15,000$180$244$207
1st$17,500$230$290$257
2nd$20,000$280$336$306
2nd$22,500$329$381$356
2nd$25,000$379$427$405
2nd$27,500$429$472$454
3rd$30,000$478$519$504
3rd$32,500$528$564$553
3rd$35,000$578$610$603
4th$37,500$627$655$652
4th$40,000$677$700$702
4th$42,500$727$746$751
4th$45,000$776$791$800
5th$47,500$826$832$850
5th$50,000$876$878$899
5th$60,000$1,075$1,059$1,097
5th$70,000$1,273$1,240$1,294
5th$80,000$1,472$1,422$1,492
5th$90,000$1,671$1,603$1,690

You can see that if you spend less than $37,500 per year on your credit card, the Rogers + Tangerine option is better.  Once your household annual spend increases over this level, the MBNA+Amazon card combination becomes superior.

However, there are a couple of key things missing from this analysis:

  1. I’ve assumed you are NOT a Rogers customer.  What if you are? Then you’d avoid the $29 annual fee.
  2. I haven’t factored in the time value of money.  For the MBNA and Tangerine cards, you can redeem on a regular basis.  For the Amazon card, you can redeem regularly at $20 intervals, but it may take some time to build up enough spending to get that $20.  For the Rogers card, if you are NOT a Rogers customer, you only get your money once per year — if you are a Rogers customer, you can redeem the cash immediately against your Rogers bill.  For any card that locks you into only one redemption per year, you lose any interest you could have obtained in investing your cash back over that year.  This is an important opportunity cost that must be factored in.

Let’s first analyze the best option if you ARE a Rogers customer.  I’ve assumed that for cards you receive regular redemption on, you will receive a 3.75% annual return (7.5% annual nominal return divided by two: some cash flows you receive 7.5% return from the beginning (or 100%) of the year, others you receive 7.5% return on from the end (or 0%) of the year). For the Amazon card, I assume an annual return of 2%, as you’ll have to wait a few months to receive one of your $20 tranches from foreign transactions and Amazon.ca charges.

You are a Rogers customer: annual cash back at various spending ranges

Income QuintileAnnual Credit Card SpendRogers+MBNARogers+TangerineMBNA+Amazon
1st$2,500-$37$47-$38
1st$5,000$14$94$13
1st$7,500$66$142$65
1st$10,000$118$189$116
1st$12,500$170$236$167
1st$15,000$221$283$218
1st$17,500$273$331$270
2nd$20,000$325$378$321
2nd$22,500$376$426$372
2nd$25,000$428$473$423
2nd$27,500$480$520$474
3rd$30,000$531$568$526
3rd$32,500$583$616$577
3rd$35,000$635$663$628
4th$37,500$687$709$679
4th$40,000$738$757$731
4th$42,500$790$804$782
4th$45,000$842$851$833
5th$47,500$893$894$884
5th$50,000$945$941$935
5th$60,000$1,152$1,129$1,140
5th$70,000$1,359$1,317$1,345
5th$80,000$1,566$1,505$1,550
5th$90,000$1,772$1,693$1,755

This isn’t really much of a fair fight.  If you are a Rogers customer, you avoid the $29 annual fee of the card and can redeem cash rewards monthly, earning interest throughout the year.

The actual breakeven point here is $47,590.  If you charge this amount or less each year on your credit card, the Rogers+Tangerine combination is your best bet.  Anything above this level, and the MBNA+Rogers card combination becomes superior.

Not a Rogers customer: annual cash back at various spending ranges

Income QuintileAnnual Credit Card SpendRogers+MBNARogers+TangerineMBNA+Amazon
1st$2,500$(66)$17$(38)
1st$5,000$(15)$63$13
1st$7,500$37$109$65
1st$10,000$88$155$116
1st$12,500$140$201$167
1st$15,000$191$248$218
1st$17,500$243$294$270
2nd$20,000$294$340$321
2nd$22,500$346$387$372
2nd$25,000$397$433$423
2nd$27,500$449$479$474
3rd$30,000$500$526$526
3rd$32,500$552$572$577
3rd$35,000$603$619$628
4th$37,500$655$664$679
4th$40,000$706$710$731
4th$42,500$758$756$782
4th$45,000$809$802$833
5th$47,500$861$842$884
5th$50,000$912$888$935
5th$60,000$1,118$1,071$1,140
5th$70,000$1,324$1,255$1,345
5th$80,000$1,531$1,438$1,550
5th$90,000$1,737$1,622$1,755

If you are NOT a Rogers customer (like most sane people), the equation changes considerably.

The breakeven point here is actually $30,210.  If you charge less than this annually, the Rogers+Tangerine combination is still superior.  Anyone with above $30,210 in annual spending (about $2,518 monthly) on their credit cards should prefer the MBNA + Amazon combination.  This basically covers almost 3/5ths of all Canadian households (the 3rd, 4th, and 5th income quintiles). (Note: you’ll want to use your Amazon card to charge any Amazon purchases, so that you can redeem your $20 chunks more rapidly and earn more interest).

Putting it all together

There’s been a lot covered in this post, so I’ve made a handy little flow chart to summarize:

And that wraps it up.  As mentioned, my next post will analyze what this optimal strategy will add to the average household’s net worth over a 30 year period.

8 thoughts to “The optimal cash back credit card strategy”

  1. I just want to say that I thoroughly enjoy these dad math blogs Michael. I’m not a father yet, but just turned thirty and am looking to set my wife and I up for our future (including kids) as best as possible. These “hacks” help immensely!

  2. Really enjoyed this article. I understand your preference for money-back credit cards but I’m curious if you also compared them with miles cards (like Aeroplan) purely based on value (i.e. cash value of miles obtained per dollar spent)?

    For a person who, for the sake of argument, plans his trips months ahead and therefore has no problem booking his flights via Aeroplan for example, is it still more valuable to go for a cashback card vs miles card?

    1. It’s hard to really put a dollar figure on travel cards — I myself used an Aeroplan card forever. I found the experience of booking through Aeroplan akin to pulling teeth — no availability, weird restrictions, etc. I may be biasing the analysis here, but I really prefer just getting cash and then deciding myself how to book travel (if that’s in fact what I want to spend the money on).

      I also find some people hoard points, which screws up the time value of the rewards. Cash in hand today is superior to the 200,000 miles burning a hole in your account, etc.

  3. Hi Michael,

    Awesome analysis on this topic, personally I use Amazon, Tangerine and PC Financial credit cards since my spending is on the low side. Just started following your blog after reading the post about internet cost on reddit. It is nice to have someone who is also from Edmonton/Alberta writing about personal finance/financial independence online.

    I almost wanted to start a meetup group on FIRE in Edmonton. All my co-workers and friends are not that interested in this particular subject, and it could get pretty lonely sometimes. I figured having coffee and chat with a few liked-minded folks could definitely help.

    keep up the good work!

    Cheers,

    Gabe

    1. Hi Gabe! Nice to hear from a fellow Albertan — and you’re right, I rarely see ppl from Alberta writing about FIRE or PF, so I thought I’d throw my opinion in the mix. I’d definitely be down for a local meetup!

      Cheers, MP

  4. Thanks for the post Michael! You don’t factor in other card benefits like Collision Waiver for rental cars, extended warranties, purchase assurance etc. These might sway the choice a little toward the MBNA World Elite (vs the Rogers card, which has none of these benefits). Any thoughts around this?

    1. I did think of this, but it’s hard to say what the monetary value of these benefits are. I’m sure it’s do-able, though! One thought — most people definitely do not take advantage of those benefits in any case (which is a shame). I do tend to find that free cards care a touch less about customer service, which is another feather in MBNA’s Elite cap.

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