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Travel Rewards VS Cash Back: A Scientific Head-to-Head Analysis

I’ve been getting the feeling I could optimize my Credit Card (CC) game by switching from my current Travel Rewards card to a Cash Back card. Let’s see where I currently stand, and most importantly, if I was right or not.

air-miles-card-large

(Note: I am Canadian so the travel rewards in question here are Air Miles and the Credit Cards are obviously offered by Canadian banks. All price are in CDN if not otherwise specified. You can substitute with your own Travel Rewards card and best available Cash Back offer in order to go through this exercise and compare for yourself.)

abbreviations:

  1. CC: Credit Card
  2. AM: Air Mile

My Current Status:

I currently have a BMO Air Miles Mastercard World Elite. Here are the specs:

  • Annual fee: $120.00
  • Air Miles: 1 for every 10$ spent.
  • World Elite benefits (travel insurance, airport lounges, car rental insurance, etc.)

I have been looking to focus on Cash Back all while lowering my annual fees, switching cards if need be. I’ve also asked you guys on twitter what your CC situation was, let’s see some polls!

Screenshot 2017-08-17 07.58.57

Screenshot 2017-08-17 07.59.17.png

So, I’m definitely convinced that I am over paying, and actually a little surprised about the high % of people using travel rewards. I was expecting a larger focus on Cash rather than Rewards.

Possible Replacement:

After a little digging, I found what seems like the best Cash Back CC in Canada. I landed on an MBNA Mastercard World Elite. Specs:

  • Annual fee: $89.00
  • 2 MBNA reward points for every $1 spent.
  • 1 MBNA point = $0,01 CDN
  • World Elite benefits (travel insurance, airport lounges, car rental insurance, etc.)

While not directly cash, the points are equivalent in the sense that they are transferable for cash either on CC balance or as direct deposit into another account (even if it’s not with the issuing Card bank). Interesting…

Time To Get Scientific!

We will conduct a medical grade scientific head-to-head analysis in order to see which CC comes out on top. Let’s go!

Introduction: You just read it.

Objective: To compare the two – seemingly top of their game – Credit Cards and find out which is best between Travel Rewards and Cash Back.

Materials and Methods: We will look at some products on the Travel Rewards site (in this case: Air Miles) and compare it to sites from which I would actually purchase said items (such as amazon.ca for items or kayak.ca for flights), to figure out the actual cash value of an Air Mile (AM). We will select a semi-random sample of items, some I would actually see myself buying. The sample consists of 3 Flights, 4 items, 1 event, and 1 gift card. Again, you can go through the same exercise by taking the best available (to you, depending on your location) Travel Rewards and Cash Back CCs and comparing them to one another.

I’ve taken a sample of fairly common and reasonable flights within Canada, relatively common and likely purchased items, a green fee at a local golf course, and a grocery gift card. Using these, I have compared the cash value to the AM value in order to calculate the Price-per-Air Mile of each item. This is the value you are getting out of each AM earned. We can then average these out based on categories.

The next step is to calculate the yield based on the money you need to spend for every AM. So: Money (spending on CC) –> AM –> Money (rewards). By eliminating the middle step we get a Money/Money ratio (so a % of Cash Back).

Note that I have also included the variations in Travel Rewards costs based on a privilege status called ONYX. To become/stay an ONYX member you need to collect >6,000 AM/year. ONYX members get better prices on flights and items, so we need to take this into account. For the sake of simplicity I will average the ONYX and non-ONYX prices, but you need to keep this in mind when interpreting the results.

Results:

Flights

Montreal – Vancouver (roundtrip, 1 person)

  • Kayak Website = Avg $1,200.00 (Transat + WestJet)
  • AM Website:
    • Without ONYX status: 6,000 AM
    • WITH ONYX status: 4,500 AM
  • Cash equivalent = $0.23 / AM

Toronto – Moncton (roundtrip, 1 person)

  • Kayak Website = Avg $500.00 (Porter)
  • AM Website:
    • Without ONYX status: 2,200 AM
    • WITH ONYX status: 1,600 AM
  • Cash equivalent = $0.26 / AM

Calgary – Winnipeg (roundtrip, 1 person)

  • Kayak Website = Avg $680.00 (Westjet)
  • AM Website:
    • Without ONYX status: 2,400 AM
    • WITH ONYX status: 1,750 AM
  • Cash equivalent = $0.33 / AM

AVERAGE CASH EQUIVALENT FOR FLIGHTS = $0.27 / AM

Items/Events/Gift Cards

Canon T5i camera body with 18-55mm kit lens

  • Amazon.ca Website: $729.95
  • AM Website:
    • Without ONYX status: 8,925 AM
    • WITH ONYX status: 7,140 AM
    • Avg: 8,032 AM
  • Cash equivalent = $0,09 / AM

Victorinox 13-piece Knife Set with Swivel Block

  • Amazon.ca Website: $349
  • AM Website:
    • Without ONYX status: 2,950 AM
    • WITH ONYX status: 2,360 AM
    • Avg: 2,655 AM
  • Cash equivalent = $0,13 / AM

Delsey Destiny 4-piece Luggage Set

  • Amazon.ca Website: $299
  • AM Website:
    • Without ONYX status: 3,600 AM
    • WITH ONYX status: 2,880 AM
    • Avg: 3,240 AM
  • Cash equivalent = $0,09 / AM

Bosch 18V 4-Tool Lithium-Ion Cordless Combo Kit

  • Amazon.ca Website: $1,018
  • AM Website:
    • Without ONYX status: 8,500 AM
    • WITH ONYX status: 6,800 AM
    • Avg: 7,650 AM
  • Cash equivalent = $0,13 / AM

18-hole Golf Round at Le Grand Vallon

  • Le Grand Vallon Website: Avg $50
  • AM Website:
    • Without ONYX status: 860 AM
    • WITH ONYX status: 690 AM
    • Avg: 775 AM
  • Cash equivalent = $0,06 / AM

Grocery Gift Card

  • Cash Value $10
  • AM Website: 95 AM
  • Cash equivalent = $0,105 / AM

AVERAGE CASH EQUIVALENT FOR ITEMS/EVENTS/GIFT CARDS = $0.10 / AM

Now let’s figure out what that means in terms of cash back. To do so, we need to figure out how many AM are earned for every $ spent:

  • AM Mastercard = 1 AM / $10
  • AM card = 1 AM / $20

Since you can use both at the same time (double dipping, whenever the AM card is accepted that is.), that means you can get 3 AM for every $20. So, on average it costs $6.67 to generate 1 AM. Again, this is a best case scenario, most times you end up using only the AM CC card and getting 1 AM / 10$.

Summary of Results:

  1. $6.67 spent = 1 AM
  2. 1 AM can get on average:
    1. $0.27 of value if traded in for a Flight. Cash back equivalent of 4.0%
    2. $0.10 of value if traded in for Other Items. Cash back equivalent of 1.5%

Discussion:

There are some limitations to consider when using Travel Rewards. It can seem pretty reasonable at first but, when trading in your AM for a flight, you still need to pay for taxes (which are usually $100+ per flight), you rarely get the AM price that was advertised, you sometimes get long/unnecessary (often ridiculous) layovers. If you take into account the taxes and higher than expected AM price, the cash back equivalent quickly goes down closer to 3.0-3.5%.

Also remember that the Cash back equivalent is overestimated here for the everyday AM member because we averaged out the AM prices for both ONYX and non-ONYX status members. Rebates for ONYX members are usually around 20% for flights and items. Since we averaged the two, everything stated is at a 10% rebate from the baseline price. ONYX members would actually be getting a cash back equivalent of 1.65% (adding the missing 10%), while non-ONYX members would be getting somewhere around 1.35% (removing the added 10%). The same can be applied to flights. Another issue is that you only get a return in value if/when you trade your AM in. You will never get the direct cash equivalent.

Variations in seasons can also affect your yield (high season would lower it and vice versa). Also note that this is only a small sample and the yield can vary individually based on different items.

Again, since the actual cost to purchase an AM is more likely to be near $10, rather than $6.67. The % Cash Back would fall by another 30-50%, let’s average it low at 30%. That means getting closer to 2-2.5% on flights, 1.2% on items for ONYX members, and 1% on items for Non-ONYX members.

Conclusion:

We have conducted a systematic head-to-head comparison of Travel Rewards (in this case Air Miles) and Cash Back. It seems like the optimal solution is to adapt to your personal preferences. The ONYX status seems easier to justify than the non-ONYX status. Although, collecting 6,000 AM per year can be daunting. Based on our calculation, and without any added AM bonuses, 6,000 AM adds up to $40,020 in spending yearly. If you spend/travel significantly, the Travel Rewards could be the best bet. If you are concentrating on frugality and investing, the Cash Back could be the best.

Personally, I much prefer getting 2% cash back across all categories – deposited directly into my account – and use it to invest or pay bills rather than getting Air Miles and trading them for a sub 1.5% yield on items or sub 3% yield on a sometimes limited selection of flights. Plus, there’s nothing stopping me from using my regular AM card (the program card that gets you 1 AM for every $20 spent) with the Cash Back Mastercard.

I have applied for the MBNA Credit Card. I will get more of my money to work for me and cut back on my annual fees! Bonus: I only need to spend $4,500 yearly to cover the annual fees on the card, which was not a possibility with my Air Miles Mastercard. Now, my annual fees are more of an investment than an expense.

Mission accomplished. Thanks science.

What’s your CC situation? More specifically, why have you chosen your current CC?

I encourage all of you to seek out the best performing CC out there, either Travel Rewards or Cash Back, and compare them to your current CC. See which comes out on top and share it with us!

Cheers!

-Dividend Investor

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Dividend Investor View All

Money Lover, Dividend Growth Investor, Youtuber, and Blogger!

5 thoughts on “Travel Rewards VS Cash Back: A Scientific Head-to-Head Analysis Leave a comment

  1. I like the cash rewards. It is quick and easy and doesn’t cost me anything at all in fees. To make travel cards worthwhile, you actually have to travel or want to actively use them. I have a friend that has the Delta Platinum card. I forget the exact fee, but I believe it is about $150 to renew it every year. But every renewal gives you 2 round trip flight tickets to anywhere in the US. So as long as you can use those tickets every year, you are benefiting from it technically. But sometimes life gets in the way, and vacations are not always in the cards. At least not ones you have to fly to. And if you want to go outside the US, you pay your own way. Guess it depends on everyone’s individual perspective and preferences.

    Liked by 1 person

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