How much is your credit card stealing from you?

You may be wondering why I’m obsessing so much about credit cards these days.  Don’t worry — the feeling is mutual.  If I had to specify why, it would probably be related to how the cash back you receive from buying things is about the easiest passive form of income you could ever find.  You’re literally changing nothing about your behaviour except which cards you sign up for and use.  And the payback can be massive — this post intends to show how massive.

Let’s recap: I’ve recently written two pieces on cash back credit cards.  The first post concentrated on identifying the best one and two card combinations in order to optimize your cash back.  The next post extended this to all three card permutations, ending in a happy little flow chart to help you personally figure out which is best for you.  I’d encourage you to peruse these if you’re interested in how I figured out which cash back credit card strategy was best for me.

Today we’re going to learn about what kind of impact this optimized strategy will have on my finances over our 30-year time horizon.

You’re probably thinking some variant of “how in the hell are you going to forecast your credit card spending over the next 30 years?”.  Good question.  I generally think that long-term forecasting is pointless (at best), but I will try to find a basis to understand how the amounts I spend today will evolve over time.  And by “over time”, I mean as I age.  Conveniently enough, Statistics Canada publishes a table of the Survey of Household Spending (Table 203-0026) that includes age brackets by detailed spending categories.  This will provide the frame for estimating how much I’ll spend over time.

Let’s start with a simple truth: household spending (in real terms) increases throughout adulthood to a peak somewhere around age 50 and slowly decreases from there.  This effect has been well-known for a long time — the StatCan table shows this clearly:

Household spending by age of reference person

Age of Household Reference Person< 3030 to 3940 to 5455 to 6465+
Average expenditure per household$63,885$86,516$103,566$85,204$51,548

Households with a ‘reference person’ (meaning the person they surveyed, usually the person who handled finances I’m guessing) age 65 and over spent less than a household age 29 and lower.  Households age 65+ actually spend less than half of what households age 40-54 spend.  People in retirement age start to ratchet down their spending, while people in the prime ages of child-raising are blowing their brains out on Blizzards and hi-tops.

But remember — we are chiefly interested in credit card spending for this post — the above numbers include ALL spending.  We’ll have to strip out anything that typically wouldn’t be paid on a credit card.  Because the StatsCan Table has an insane amount of detail, I think I can reasonably strip out all or most of this non-credit card spending.  We will delete the following categories:

Rented living quarters
Mortgage paid for owned living quarters
Condominium fees for owned living quarters
Property and school taxes for owned living quarters
Homeowners’ insurance premiums for owned living quarters
Other expenditures for owned living quarters
Water, fuel and electricity for principal accommodation
Owned vacation homes and other secondary residences
Other owned properties
Child care
Purchase of automobiles, vans and trucks
Fees for leased automobiles, vans and trucks
Private and public vehicle insurance premiums
Private health insurance plan premiums
Tuition fees
Financial services
Income taxes
Personal insurance payments and pension contributions
Gifts of money, support payments and charitable contributions

Stripping all of this out, the average annual household spending able to be charged on credit cards is:

Average household spending on credit cards by reference age

Age of reference person< 3030 to 3940 to 5455 to 6465+
Average credit card spending per household$28,906$35,325$41,753$35,935$24,880

What’s remarkable is that I’m right in the middle of the 30’s age bracket and will charge almost exactly that bracket’s amount this year on my credit cards(give or take 5%).  So from this point on, I’m going to assume I’m a pretty close representation of the “average spending” by age.

Using these benchmarks, I attempted to smooth an assumed line of credit card spending per specific age instead of just relying on the broad age buckets.  My best guess of what this looks like is something like:

The constraint of this curve is that it’s expressed in today’s dollars — if I want to figure out how much I’ll spend at each age for 30 years, I need to inflate each age’s above spending by the number of years until I am that age.  I’m 35 now, so for age 40, I’ll need to inflate today’s age 40 average spending by 5 years, etc (my blanket assumption is 2% annual inflation).  This is what my personal spending will (kind of) look like in inflated vs uninflated dollars for the next 30 years:

Instead of peaking at age 50, my inflated spending is projected to peak at age 54 and more gradually abate from that level compared to the uninflated line.

Now that we know (kind of) how much I’ll be charging to credit cards over the next 30 years, we can estimate how much I’ll benefit from different credit card rewards strategies.  To put this contrast in personal terms, I’ll be comparing my previous credit card strategy (only using the TD Aeroplan Infinite card) with the optimized credit card strategy I found in a previous post (MBNA World Elite for daily purchases, Visa for foreign transactions, PC World Elite for non-Costco groceries).  Let’s compare these two scenarios in detail for just this current year.

Strategy A – Optimized

2017 Annual Spend: $35,688

Percentage of annual credit card spending:

  • 2.5% foreign transaction spending – at 1% net cash back
  • 10.5% PC Card grocery purchases (this is half my 21% credit card spending on groceries, the other half being Costco) – at 3% cash back
  • 87% everything else – at 2% cash back

Annual Fee: $89 for two MBNA cards (other two are free)

Immediately invest my cash back with a 7.5% assumed annual rate of return (different cash back envelopes throughout the year will gain differing portions of that 7.5% annual return)

Using this strategy, I will gain a $680 addition to my net worth by the end of this year.

Strategy B – Old TD Aeroplan Card

2017 Annual Spend: $35,688

Percentage of annual credit card spending:

  • 2.5% foreign transaction spending – with a -2.5% foreign transaction fee
  • 1.5 Aeroplan points per dollar for groceries, gas, and pharmacies.  I assume 25% of my credit card spending is in those categories, however VISA does not consider Costco to be groceries, so only 14.5% of my spending will earn points at that rate.
  • 85.5% everything else – at 1 Aeroplan point per dollar
  • Total Aeroplan points received: 38,275

Annual Fee: $170 for two cards

No assumed rate of return, as I cannot earn interest or investment returns on my rewards while they wait for me to book a flight.

The best return on Aeroplan points I ever experienced in my ELEVEN years using this card was flying to London, so I’ll value Aeroplan points based on flying to that location:

  • It takes 60,000 Aeroplan points to fly one person to London.  This only covers the ticket price, not any fees, taxes, or surcharges.
  • Looking at various Wednesday to Wednesday flights in the autumn, it seems as though actual ticket prices can be found for as low as $625.  Remember, I want to use the lowest price for comparison, because in Strategy A I could simply find my own flight sales and pick the best deal.  That’s what these 60,000 points are worth.

Using this strategy, I will gain a $206 addition to my net worth by the end of this year.

Strategy A ($680) – Strategy B ($206) = $473 addition to my net worth in 2017 using Strategy A (with a touch of rounding error)

This was pretty mindblowing.  By using my old TD Aeroplan card I was essentially burning $473 dollars this year.  Let’s see these two cash flows evolve over a 30 year period (assuming 2% inflation on everything mentioned above).

Comparing optimized vs Aeroplan credit cards over 30 years

Year 1$35,688$680$206
Year 2$37,128$709$218
Year 3$38,612$739$230
Year 4$40,140$770$243
Year 5$41,714$802$256
Year 6$43,335$835$269
Year 7$44,709$863$280
Year 8$46,120$891$291
Year 9$47,569$920$303
Year 10$49,059$950$314
Year 11$50,588$981$326
Year 12$52,160$1,013$339
Year 13$53,773$1,045$352
Year 14$55,431$1,079$365
Year 15$57,133$1,113$378
Year 16$58,882$1,148$392
Year 17$59,373$1,156$393
Year 18$59,860$1,165$393
Year 19$60,343$1,172$394
Year 20$60,822$1,180$394
Year 21$60,478$1,170$385
Year 22$60,096$1,159$376
Year 23$59,675$1,148$367
Year 24$59,213$1,135$356
Year 25$58,708$1,121$346
Year 26$58,159$1,107$334
Year 27$57,566$1,091$323
Year 28$56,925$1,074$310
Year 29$56,235$1,056$297
Year 30$55,495$1,037$283

Over this 30-year period, my household will charge something like $1.6 million on credit cards.  Strategy A would garner over $30,000 back in my pocket, while the Aeroplan points net all fees would amount to about $9,700 worth of flight tickets to London.

But what’s the difference in your net worth after 30 years by following Strategy A?  Remember:

DadMath Maxim #4 – Invest 100% of every dollar you save

So it’s not just the dollars in your pocket that matter — the incremental benefit you get from Strategy A is invested and accumulates interest every year. Over time, this will have a huge impact on my net worth. The next chart shows this compounding growth:

Addition to your net worth over 30 years

By using my old TD Aeroplan credit card, I was missing out on financial gains that would net me almost $65,000 before I turn 65. $65,000 for literally pulling out a different piece of plastic from your wallet. These seemingly small things have massive effects over time — that’s basically what this entire blog is all about.

One thought to “How much is your credit card stealing from you?”

  1. Good post, Michael! Currently using the West Jet RBC card for all utilities and some other bills, PC financial card for gas and groceries, and TD aeroplane for miscellaneous stuff. Am I missing the boat? This doesn’t sound optimized according to your charts. Thanks for the blog!

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