Loyalty Lesson Cash Back

Loyalty Lesson: How a card with 4.16% cash back can be better than one offering 5%

Quite early in their school careers, kids learn greater than and less than in math class and in the simplest form something like 5 will always be greater than 4. But outside of the simplest form when you take into account additional factors it is possible for 4 to be worth more than 5.  And in this loyalty lesson we show how a card with a 4.16% cash back earn rate can be better than one offering 5%.  Yes, it’s time for Rewards Canada to take another shot at BMO to show how their ‘sly marketing’ is used to actually divert attention from how weak their credit card offerings really are. (Apologies to the bank but you simply make this too easy for me to write about)

The card with the highest cash back earn rate on groceries in Canada

BMO Bank of Montreal currently markets their BMO CashBack® World Elite®* MasterCard®* as having “the highest cash back earn rate on groceries in Canada”. Technically speaking it does have the highest cash back earn rate for groceries for a cash back card with that published 5% cash back. However with so much crossover between travel rewards and cash back cards nowadays one needs to look at all the available options for earning actual cash back.

This means we can and should actually compare the BMO CashBack World Elite Mastercard to numerous cards such as the American Express Cobalt Card (it awards the equivalent minimum of 5% cash back for groceries) or the Scotiabank Gold American Express Card (it awards the equivalent of up to 6% cash back when redeemed for cash back towards groceries) so the BMO card isn’t the only one that offers 5% back on groceries.

However for the sake of this loyalty lesson we felt it best to compare it to another World Elite Mastercard, the MBNA Rewards World Elite Mastercard a hard hitting card offering 5 points per dollar on groceries which in terms of cash back, is actually lower than 5% but when you take into account additional factors, it works out better than the BMO card.

When we talk about taking additional factors into account, for this loyalty lesson that primarily means spending caps, which BMO doesn’t like to mention in their marketing surrounding the highest cash back earn rate on groceries.

How a card with 4.16% cash back can beat out a card that offers 5% cash back

Being World Elite Mastercards, both the BMO card and the MBNA card have the same income requirements of $80,000 personal or $150,000 household. So, by no means are the people who can and do get these cards considered low spenders. And when it comes to groceries most people who are able to apply for and receive a World Elite Mastercard will most likely fall into the $1,200 to $1,600 average monthly grocery spending range for Canadians.

And that brings us to the question of how does a 4.16% cash back card beat out a 5% card on that spending? And the answer is easy: Spending Caps. (Check out our loyalty lesson on Spending Caps here).

In this case, the BMO CashBack World Elite Mastercard has a $500 monthly cap on its 5% grocery earn rate. That’s right – a very low $500 of grocery spending per month. I don’t know about you, but personally the Rewards Canada family easily spends that much in about a week and half on groceries and that lines right up with the $1,200 to $1,600 Canadian average.

The MBNA card on the other hand awards 5 points per dollar spent on groceries with an annual cap of $50,000 dollars. You do have to know that when redeeming MBNA’s points for cash back it has a lower return than their travel rewards. You have to redeem 120 points for a $1 cash back credit which is the equivalent of a 4.167% cash back return for those 5 points per dollar.

So you have a card where you earn 5% on $500 monthly and one offering 4.167% on $50,000 annually. Which is better? If you are quick at math you’ll already see where this is heading.

The math on 5% versus 4.16%

Let’s do the math on the cash back earned based on the Canadian average for household spending on groceries:

For $1,200 of monthly spending the BMO card will provide 5% back on your first $500 and then 1% on the rest. That works out to $32 cash back. For $1,600 in spending, again it is 5% for $500 and then 1% on the remaining $1,100 which works out to $36 cash back.

For $1,200 of monthly spending the MBNA card will provide 4.167% cash back on all of the spending. That works out to $50 cash back. For $1,600 in spending, again you’ll earn the equivalent of 4.167% for a total of $66.67 cash back.

So here you have the card with the highest cash back earn rate on groceries rewarding $32 to $36 cash back for the average Canadian. And the card that doesn’t have the highest cash back earn rate? It rewards the cardholder with $50 to $66.67 in cash back!

In both cases the MBNA card earns significantly more than the BMO card but it doesn’t stop there. The MBNA card also has a 10% Birthday Bonus on all spending throughout the year up to a maximum of 15,000 bonus points. This means the cardholder could actually come out with $55 to $73.34 in cash back! That’s more than double the cash back on $1,600 of monthly grocery spending than seen on the BMO card.

BMO Cash BackMBNA Cash Back
$1,200 in spending$32$50 to $55
$1,600 in spending$36$66.67 to $73.34

Wrapping it up

As I mentioned at the start of this post, BMO makes it easy for me to write these loyalty lessons. One of the most popular posts ever on Rewards Canada was our lesson on “When earning 5x points isn’t the same as earning 5x points” where we had BMO in our sights for their 5x points cards that actually work out to the equivalent of 3.34 points. Again we have them here as the scapegoat for this post. This time however the 5% does equate to 5% but that unbelievably low $500 monthly cap for a premium card is unfathomable. I could see a $500 cap on a no fee cash back card but not on a $120 card like this. But that’s BMO and their credit cards in a nutshell for you.

Granted, if you only spend around $500 – $600 a month in groceries then by all means, the BMO CashBack® World Elite®* MasterCard®*  is an excellent option but once you approach $650 or more in monthly spending there are options where you will earn more. Some examples are: