Nearly 60% of Canadian consumers have a rewards credit card, and many of those are linked to travel rewards programs like Air Miles and Aeroplan. These two popular programs have been a staple in many Canadians’ wallets for decades, but recent changes that increase the number of points required for flights or gift card rewards have led to frustration for many consumers.
Recently, cash back rewards have gained significant ground by going after travel rewards programs on their restrictions, booking fees, expiration policies and limited flexibility.
The allure of a “free vacation” keep many Canadians loyal to their travel rewards programs, but for me, cash back is king. Here’s why cash back beats travel rewards:
Cash back credit cards are as straightforward as they come. You earn cash back on your every day spending, typically 1-4%. Depending on the card, you can either redeem your cash back rewards whenever you feel like it, or once you hit the minimum threshold the card company will send you a cheque in the mail. Some cash back cards even allow you to apply your cash rewards to your credit card statement. Simple.
With a no fee card like the MBNA Smart Cash MasterCard, you can earn $16.50 a month in cash back rewards when you spend $1,250 a month (including $400 per month on groceries and gas). That’s a return of 1.3% on your spending!
With most travel rewards credit cards, you earn 1 or 2 travel points for every dollar spent. Unfortunately, it’s nearly impossible to determine the exact value of your travel rewards points. Because the price of flights and hotels vary drastically from day-to-day and season-to-season, it’s difficult to pin-point the actual cash value of your rewards.
Then there’s redeeming your travel points, which I’ve already mentioned can be a hassle when you factor in booking fees and restrictions. Also, if you’re saving your points up for a dream vacation, you have to keep the expiry policy in mind. It can take years to build up enough travel points for a long haul trip.
I like to figure out what each mile is worth so that I know which card or program gives me the best bang for my buck. For example, if you use an Air Miles credit card you’ll typically earn 1 Air Mile for every $20 spent. If you spend $2,000 a month, you’ll earn 100 Air Miles.
When you redeem Air Miles for gift cards or with the new Air Miles Cash program, it takes 190 Air Miles to get you $20. That means each Air Mile is worth 10.5 cents. If you redeem Air Miles for flights, you might get a value closer to 17 cents per mile.
Using the above example of spending $2,000 a month with your Air Miles credit card, you’ll earn anywhere between $10.50 and $17 a month when you convert your Air Miles into cash. That’s a return of between 0.525% and 0.85% on your spending.
In order to beat the cash back rewards card you’ll need to earn twice as many Air Miles (200) each month.
I use the MBNA Smart Cash MasterCard for all my daily spending and recurring bill payments. I have been using this card for almost a year and will typically receive a $50 cheque in the mail every 4-5 weeks. If I wanted to ear-mark this reward money for travel, I can simply open up a savings account and deposit the cheque every month. Getting cash back means I can redeem my rewards for anything I want.
One travel rewards card that I will consider using is the Capital One Aspire Travel World MasterCard. Not only does this card offer some juicy rewards (double miles on every dollar spent, 35,000 welcome bonus points, and 10,000 anniversary points), but you can also redeem your points for cash.
Do you prefer to get cash back or travel rewards?