Archive for Travel

Credit Cards and Rewards

In the last two months, I’ve been on a search for a better credit card. Since there are cards now (well, they’ve been around for a quite a while) that reward you for your purchasing dollars, I wanted to “upgrade” from my no reward card to one that at least gives me something back for all those merchant fees that they make from me and the companies I buy stuff from. So I embarked on a journey through the internet in search of all things rewards. They pretty much boiled down to two categories, reward points/miles or cash back. And I didn’t want an annual fee, which I’ll get back to later on.

The rewards category allows one to accrue points/miles for future redemption. After a cursory look at the amount of points I’d need to raise to get something from a limited reward selection, I decided rewards programs weren’t for me. The airline points is interesting, but rarely do you get more than 1 mile/1$ you spend. I wanted to see what the equivalent cash value of a mile was. After investigating further, I found a few sites, one of which was actually quite useful.

Averaging across programs, and assuming that you have the financial wherewithal to choose between spending miles or spending cash, I would consider 2 or more cents per mile to be the target, 1.7 cents per mile to be breakeven, and 1.5 cents the absolute floor.

So it appeared to me that getting only one mile per dollar was not a very good deal at all. (However if you do it just for the promotional 10-25K miles that they give out for signing up, it might be more worth it in the short run. But I didn’t want to keep picking up cards just for the airline miles.)

The next option was cash back. Now I believe Discover had a 5% cash back card a while back and American Express Blue Cash offers 5% back as well. But you really have to look at the nitty gritty details. For the Amex card, you have to spend over $6,500 first in order to get to the 5% back stage, and you only get it from groceries, drugstores, and gas stations. I don’t spend that much on groceries or gas. (Edit 09/22: As you’ll see below in the addendum, I’m wrong about this.) And I rarely get prescriptions filled. So those were no good. And then I saw the Amex True Earnings Costco card. A smaller 3% cash back. But it was for restaurants and gas. A 2% cash back, for all travel related expenses. And 1% on everything else. I figure the bulk of my spending is for eating out and traveling. Which would put me between 2 and 3% cash back. And that starts with the first dollar I spend, not the 6,501st dollar. Taking a further step back, I tried to compare it as best as I could with the airline mileage reward cards. For every dollar I spend, I’m gonna average a guaranteed better than $1/1mile ratio. It’s hopefully going to better than the $1/1.7mile ratio that the site says should be about break even. So I think I’ve found a winner. The downside I’ve found are the following:

  • Only a single annual rebate, in February. Other cash back programs provide up to a rebate every statement
  • You need to be a current Costco member, which means a $50 membership fee every year. That to me is worth it since Costco provides great value for its customers
  • No fancy concierge services that “Platinum” card services provide
  • More limited merchant acceptability due to Amex

To me, those negatives don’t outweigh the positives. Oh, and back to the annual fee cards. I think many of the airline mileage cards charge an annual fee, up to $85/year, and the Amex cards can charge up to $450 (Platinum) or more ($2000 for Centurion). But based on some of the feedback from “7337″ friends who have the card and use the service, it’s quite useful and worth the annual fee. But ya gotta be more balla than me :)

Addendum 09/22:

I looked up some more cash back cards and a lot of them like to advertise that they are 5% or 6% cash back. But they really like to play tricks with you. Some like Discover’s More card rotate the categories on which you get the cash back on a quarterly basis. So for example, you’d only earn cash back on travel done January to March, and cash back at restaurants only in October to December. I guess you’re just supposed to eat out at the end of the year. Others allow you to get cash back on the categories you spend the most money on. But guess what, the categories are like these: gym memberships, toll booths, fast food restaurants, movie theaters, utilities. Seems kinda like a joke to me. These categories are so granular, you’re not gonna to be spending a significant amount of money on any one of em, except for gas, which might be $75 back a year (assuming around 20mpg, 15k, and $3.50/gal, 3% cash back) for this type of card. And then there’s Amex Blue cash, but you have to spend over $6,500 a year on groceries, drugs, and gas (”everyday purchases”). I’ll give you $3k to spend on gas — that’s a lot of driving (even at $4/gal, and 20mpg, that’s 15k a year). Now you spend $3.5k on groceries. That’s $290 a month, which is quite doable. Now try spending another $3k on groceries and gas, which will bring your spending up to $9.5k. The true average money back percentage? 2.3%. Now don’t forget you’ll be spending money on other stuff, let’s say $5k in eating out and clothes, around $415 a month. You only get 1.5% back on that stuff. Which brings your true weighted percentage to..2%. But wait a minute. I think I made an error. The change-over for the rate applies to $6500 in total purchases, not the everyday amount. So let’s turn it around then, shall we? Let’s say you start the year off and for what strange reason, you eat out/travel/buy general merchandise (all of the non-everyday items) and spend $5k first. You get 0.5% cash back on that stuff before the $6500 mark. Then add $1500 of everyday items to get to $6500 total. Then add $8k of everyday spending (so you get the 5% cash back). Let’s do some calculating…3.0%. Pretty good. But look at what you had to do. That’s a lot of work. It seems like blue cash could work well for people with joint accounts, that could have an additional card holder or two that would drive up the amount of money spent to make the $6500 threshold a much smaller threshold. But they would literally have to drive as well, because gas purchases is a big factor. And groceries. And drugstore stuff. Then it might make more sense to use this card.

As always, this is just a little research and what made sense to me when I wrote it so make sure you do your own calculations.