Best Canadian Credit Card: Personal Credit Card Preference

In the end, Credit Cards are one of two things for an individual consumer:


A) A Benefit

B) A Nightmare

There are 3 main companies offering Credit Cards in Canada: Visa Inc. (Public, NYSE:V), MasterCard Incorporated (Public, NYSE:MA), and American Express Company (Public, NYSE:AXP).  Each has benefits and costs; however, they are all competing fiercely and all offer similar plans.

For any consumer that pays their card off in full every month the card is definetly a Benefit. Even if you do not pay off the card in full every month, as long as you have a line of credit you can leverage to pay off that Credit Card then you be still consider the Card a Benefit.

If you answered “(A) Benefit “ to the above question than you have some great opportunities.  Do you want Airmiles, a low interest rate, Dividend Dollars, points towards purchase discounts at a particular store, etc. There are so many options, but which one is best and why?

If you think you know the answer to this question you might be surprised by what my answer is.  Anyone with even a basic understanding of Economics could likely predict what my answer is here and likely hold the same opinion.

My answer is based on answering this basic question: Which Credit Card Benefit provides an individual with the highest Utility?

Utility? I hope I didn’t just initiate flash backs to Econ 101 Nightmares.

Utility is basically the satisfaction derived from the consumption or use of a good or service.

What provides the highest Utility to an individual? Let me answer now and then provide an explanation: Cash in Hand!

Assumption 1: To keep things simple let’s assume that there are 3 possible credit card benefits offered: Airmiles, Points for discounts at a department store, Cash in Hand (Dividend Dollars).

Assumption 2: You currently consume can spend $100.  For example, $100 on airlines and $0 on Department stores or $0 on airlines and $100 on Department stores, or some mix of the two.

Assumption 3: Let’s make a lot sided assumption just to highlight the best benefit, If you use the Airmiles Card you get a $50 bounus in travel or if you use the Department Store Card you get $50 in purchases.

Let’s make a nice picture because economist appreciated drawings.

Nice Picture, but what the heck does that mean.
 
I1: You Budget Line.  This is the Total amount that you can afford to spend on Airlines and Department stores.  On the Y axis I have placed Airlines; assuming you spend all your $100 on Airlines and $0 on Department Stores.  The other connector for the Budget line is Department stores, here we assume we spent all $100 on Department Stores.  This is our budget line; anyting along this line represents a mix of spending on Airlines an Department Stores.
Now let's spice it up and see what happens when we get the Airmiles Credit Card

This is one confusing picture, but if you analyze step by step it's pretty clear.

1) Because we get the Airmiles Credit Card we now get a $50 bonus to use on Air Travel so our Budget Line (I1) rotates because we can now afford $150 in Air Travel or $100 still in Department Store purchases.  The new budget line is I2 and is shown in Blue.

2) We get a new higher Utility from useing the Airmiles Credit Card seen at U2 (in red)

3) If instead of getting $50 for Air Travel only we got $50 Cash to spend on what ever we want then our budget line would Shift instead or Rotate; the new budget line would then be I3 (the Brown line).  This is because we could now Buy a maximium of $150 in Airmiles or $150 in Department stores.

4) With the Cash you can see that we are better off because our Utility is at U3 (in red), which has a higher value than U2.
Let's see how this works if we get the Discount Store Credit Card instead:

1) Because we get the Department Store Credit Card we now get a $50 bonus to use on Department Store purchases so our Budget Line (I1) rotates because we can now afford $150 in Department Store purchases or $100 still in Airmiles purchases. The new budget line is I2 and is shown in Blue.


2) We get a new higher Utility from useing the Department Store Credit Card seen at U2 (in red)
3) If instead of getting $50 for Department Stores only we got $50 Cash to spend on what ever we want then our budget line would Shift instead or Rotate; the new budget line would then be I3 (the Brown line). This is because we could now Buy a maximium of $150 in Airmiles or $150 in Department stores.

4) With the Cash you can see that we are better off because our Utility is at U3 (in red), which has a higher value than U2.

This proves that the Dividend Credit Card is the best to use because it allows you to have the highest Utility since you can purchase more goods than without a credit card and it also provides a higher utility than the Airmiles or Department Store Credit Card since we can choose how much of each good to consume.

The next step would be to do this anlysis with slight differences in the amount of benefits made available with each card.  If the Airmiles of Department Store credit cards provided more of a benefit for the same amount of purchases then the Dividend Credit Card than you may have an alternate out come.

For me, I have used a number of different credit cards over the years including a number of divident cards.  I have finally settled on the new Scotia Bank Momentum card because you get 2% cash back on everyday purchases and 1% cash back on everything else.  These dividend dollars add up very quickly. 

My previous Credit Card only paid 1% dividends and had a step function.  For the first $5,000 you would get 0.25% and the next $2,000 at 0.5% and then fianlly above that amount I would get 1%.

My new card dosn't have a step function so it's 2% from the beginning.

I hope this article helps you find the best credit card for you.