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Written by K.Amjad

19th November 2019

Why Not Pay Your Tuition With Your Credit Card?

A 29-year-old bought a $60,000 USD Tesla with a credit card and earned an estimated $5,000 USD in rewards. Every competitive credit card has reward incentives for performing transactions. An Aeroplan (Air Canada's loyalty program) credit card will usually reward you 1 Aeroplan point for every dollar transacted. These points accumulate and can be redeemed for flights, hotels, and rental cars. On the other hand, completing transactions using cash has no reward incentives. Increasingly, universities are allowing students to pay their tuition (plus a fee) by credit cards. Paying by credit card for a large transaction will produce a large amount of reward, but not without some price. In this article, I will show you how the reward from credit card transactions outweighs the fees you have to pay for a credit card transaction.

Merchants (such as Starbucks and universities) have to pay a percentage of every credit card transaction to the credit card vendor (Visa and Moneris). Merchants cannot charge a different base price to customers based on their form of payment; however, they can disincentivize customers from using credit cards by charging customers a fee on the credit card transaction. You don't see this disparity on a day-to-day basis because we usually deal with big companies; these big corporations are able to set the same price between the two methods (cash and credit) due to economies of scale. A high amount of transactions in both cash and credit cards will spread out the fees and expenses owed to the credit card vendors. Companies that do not have a high amount of credit card transactions are unable to spread out the expenses and are more likely to charge a fee to the customer on credit card transactions.

Question:

Let's suppose your tuition owed is $42,500 CAD and you have the option to pay it with a credit card through your university portal at a fee of 1.75% ($743.75 CAD). The total cost to you is $43,243 CAD. On this transaction we will earn 43,243 Aeroplan points -a point for every dollar transacted.
Is the reward earned (43,243 Aeroplan points) beyond what you pay as the fee/premium ($743.75 CAD) for the transaction?

Customer Fees

Fee/Premium is the cost of a credit card transaction over the cost of the transaction in cash

Paying the University in cash

You would pay the university $42,500 CAD but receive no reward for the transaction

Paying the university through credit card
You would pay the university $43,243 CAD (paying a fee/premium of 743.75). You will receive 43,243 Aeroplan points in rewards for this transaction.

Answer:

Paying through the university portal earns us 43,234 Aeroplan points but we pay a premium of $743.75 CAD. Imagine this as paying a dollar to earn 58 (=43,234 /$743.75 CAD) points per dollar. However, the real answer depends on your expectations and usage of the points.

Rewards Program

Credit cards will award differently for the amount spent and the loyalty program. Firstly, you may be rewarded more points for doing specific transactions. Secondly, two similar programs may not be comparable as believed. There are subjective measures to value points, We can measure the value of points as an approximate cash value however they are the most robust measurements of 'real value' .

Expectation and Use of Points

There are a lot of uses for points and points maybe redeemed partially or fully. To really measure if paying for your Masters with your credit card is worth it, we need to evaluate if the redemption we use the points for is beyond or equal the premium we paid!

Let's assume I wanted to find a business class ticket from Vancouver to Toronto on December 15th. On Google Flights the price is $1108 CAD.

Example

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On the other hand, Air Canada reserves certain seats on each airplane for redemption bookings. Redemption bookings are tickets where you use your points, instead of cash, to purchase a seat on a flight - taxes have to be paid in cash. On Aeroplan's website we find the same business class ticket for 25,000 points + $83.76 CAD. Remember, it cost us $743.75 CAD to acquire 43,234 Aeroplan points. Proportionally, it cost us (25,000/43,234)*$743.75 CAD= $430 CAD to acquire 25,000 points. We can therefore imagine 25,000 points + $83,76 CAD =$430 CAD + $83.76 CAD  = $514 CAD. This is way cheaper than paying $1,108 CAD outright and it costs less than 50% of the cash ticket.

Business Class - Aeroplan.PNG

A chart describing the net value gained from booking the ticket using points versus outright cash.


Since we have no points available, the ticket has to be an outright purchase, costing us $1.108 CAD.

** (25,000/42,234)*$743.75 CAD = $430 CAD

It's All About What You Want

If we redeem our points for the Toronto to Vancouver flight we are basically paying $514 CAD (25,000 Aeroplan Points + $83.76 CAD) for an item that is valued at $1,108 CAD. We are receiving a massive discount on the flight. Even after the redemption we still have 42,234 - 25,000 =  17,234 Aeroplan points left.  

Also, suppose we had to use all of our 42,234 Aeroplan points + $83.76 CAD to redeem for the Vancouver flight. The points cost us $734.75 CAD (in fees). So our total relative cost is $734.75 CAD + $83.76 CAD = $818.51 CAD, which is still cheaper than paying $1,108 CAD outright.

Expectations also play a big part in redemption. There are redemptions that turn out to be more expensive than outright purchases. The best choices for redemptions are long-haul flights, premium class travel, or premium hotel stays.