In honor of a young padewan who hopes never to fly coach again, I am updating a post from a few years back. As veteran credit card schemer Gary Leff lays out, there are generally 3 reasons to hold a credit card:
- Bonuses - Miles and points that are good toward travel or gift cards.
- Benefits - Getting free price protection, primary rental car insurance, lounge access, or companion travel passes.
- Rebates - Earning a rebate on your everyday purchases meaningfully more than the standard 1% back.
Bonuses
We are living in a second Golden Age of credit card bonuses. The first was when credit cards let you earn bonuses on the same cards more than once, but most banks have wised up and no longer let you "churn" cards. This second Golden Age is the age of humungous sign-up bonuses. I remember signing up for credit cards for a 10,000 mile bonus, and paying an annual fee for the privilege. Today, that's chump change, and furthermore only chumps pay annual fees. I believe today's golden age of monster bonuses are a result of the Durbin Amendment, which is creating strong incentives for banks to get consumers to adopt credit cards over debit cards. How long issuer incentives will last is not clear, but I suggest taking advantage the bonuses while you can.Bonuses are pretty straightforward. The issuers advertise a lump sum of points or miles, usually with minimum spending requirements. If you had the card before, issuers like Chase and American Express will deny you from getting the same bonus again. There used to also be 0% balance transfer bonuses, but today virtually all of these offers have a minimum fee that makes it not worthwhile. My advice here is to do two things:
- Hold out for the big bonuses. Bonuses worth less than $300 are a waste of a credit inquiry. Also be aware of how big bonuses have been historically. For example, the British Airways card from Chase offers 50,000 miles, which seems like a lot until you remember that they have offered 100,000 miles twice before. Similarly, in the previous post, I note that the Citi ThankYou Preferred card had an unusual 50,000 point bonus (link still working, but no guarantees) vs. the typical 25,000 point bonus, so if you ever want to own this card for the bonus, last week was a good time.
- Apply for cards that will disappear. Since you (usually) can't earn bonuses more than once, cards that are going away are use-it-or-lose-it opportunities to earn miles. This usually happens when 1) an airline gets merged (e.g. Northwest bought by Delta), 2) an airline changes credit card partners (U.S. Airways switching from Bank of America to Barclays), or 3) when card products get changed (e.g. Citi's PremierPass cards changing to ThankYou cards). In each of these cases, you have an opportunity to double dip (i.e. earn miles twice in the same program with the predecessor and successor cards).
Benefits
There are several categories of benefits, ranging from travel to price protection. Below are the key benefits that cards generally offer. Which you find most valuable obviously depends on your travel and spending patterns.- Companion passes: Most companion passes are pretty worthless because they are capacity controlled or require you to pay a higher fare level. But several programs have passes that are very worthwhile: 1) Chase British Airways gives you a companion pass for a mileage redemption but you must spend $30,000 on the card to earn one, 2) BofA Alaska Airlines card gives you a companion pass good for any class of service (think First Class to Hawaii), 3) Citi ThankYou cards give you companion tickets for domestic (Premier card) and international (Prestige card) travel.
- Price protection: This is an increasing rare benefit but can be very valuable. If you buy something but find it cheaper later, you can get a check for the difference. American Express used to offer this benefit but stopped. Today, some credit cards like the Citi ThankYou Premier offer it. I have a credit card that offers it for Internet prices (!), but this card is no longer open to new customers.
- Primary CDW rental insurance: When you rent a car, your credit card more often than not offers a form of insurance. However, with a few exceptions, this insurance is not primary insurance--it's secondary to your own personal insurance. So when does secondary insurance get triggered? Almost never. Some cards like the Continental OnePass Plus offer primary rental insurance. Nerdwallet has a list of current cards offering primary insurance.
- Free checked bags: Most airlines offer a credit card where you can get free checked bags.
- Lounge access: Some people love airline lounges and good for them. Cards that offer lounge access include the American Express Platinum card (American, Delta, US Airways) and the Citi Prestige card. Continental Presidential Plus offers lounge access to United and Continental lounges.
- Elite status: Some cards also offer hotel elite status, generally at the middle tier. The American Express Platinum card offers complimentary gold status with Starwood and the Citi Prestige offers complimentary gold with Hilton.
- Roadside assistance: American Express Gold and Platinum cars offer this benefit for $50 per incident. The United MileagePlus Explorer card offers a similar benefit.
Rebates - Miles & points
Do you earn less than $500 worth of rebates from your credit cards every year? You might be able to do better. This is the most complex way of earning rewards, but it can pay off. Assuming that you can manage spending and payments on a multitude of cards, your optimal spending strategy depends a lot on your pattern of spending and how much you value miles and points. How much you value miles and points depends on your utility for premium travel, your travel patterns, and your travel flexibility.For example, I recently redeemed miles for premium cabin airline tickets worth about $35,000, or $0.16 per mile redeemed. Would I pay $35,000 for this travel? Um...no. What would I pay? Maybe $5,000, or $0.02 per mile redeemed. Was it a pain to use these miles? Absolutely. We didn't get the dates we wanted, and we almost changed our destination based on availability. Would I rather have had $5,000 in cash to buy tickets on the days I wanted? Probably. Miles can buy great deals on travel--especially premium cabins--but they can be frustrating and time consuming to use. Because I don't value premium cabins much, I value most miles at about 1.5 cents per mile. A lot of the travel experts value them at triple that, because they prefer to travel in business/first all the time. Some people value their legroom.
Programs like Chase's Ultimate Rewards or Citi's ThankYou points can be hard to value. Chase points can convert directly into United miles if you have a Chase Sapphire or Chase Ink card, so you can value them as airline miles which are a good use of the points. Citi's ThankYou points are generally worth less than a penny, unless you have a Citi Premier card (which adds 25% in value when redeeming for airfare) or a Citi Prestige card (which adds 33%). So if you have both a Citi Prestige card and a Citi Forward card, each dollar you spend at restaurants and Amazon.com convert to 5 points that are redeemable for 6.67 cents in airfare. So you have some travel experts tripping over themselves to get 2.14 miles per dollar in restaurant spending, but they are giving up 6.67 cents in airfare that would earn them those precious miles that they forfeit by using mileage. It's worth it to accumulate miles if you will redeem them for business or first class, but if you find yourself redeeming miles for economy travel, take a step back and consider cash/point alternatives. Let's take some examples. Plugging in a date in March, I get airfare on Cathay Pacific of:
| SFO-HKG Economy | SFO-HKG Business | |
| Cash | $1,103 | $5,973 |
| Miles (if available!!!) | 70,000 miles spent | 110,000 miles spent |
| Value per mile (before taxes & opportunity costs) | 1.6¢ | 5.4¢ |
| Taxes & opportunity costs (don't forget!!!) | 13,800 miles earned on cash $350 taxes on award | 17,250 miles earned with cash $350 taxes on award |
| Value per mile (after taxes & opportunity costs) | 0.9¢ | 4.4¢ |
| Value per mile as elite member (after taxes & opportunity costs) | 0.8¢ | 4.0¢ |
So what to conclude from this? If redeeming for economy travel, your value per mile is pretty poor. If your travel dates are rigid (e.g if you usually travel during the holidays), then plan on spending double the miles and getting 1/2 the value per mile shown above if traveling on your loyalty program's own planes but forget it if you're relying on alliance partners, who generally offer seats using "saver" award capacity. But even if you're redeeming miles for business class travel, consider this: the 110,000 miles I spent could have easily earned $2,200 in cash back rewards using a simple 2% back credit card. Would I rather 1) redeem miles and fly business (subject to availability) or 2) spend $1,103 for an economy ticket, save $350 in award taxes, and have $1,447 more to spend in Hong Kong while earning miles and status for my next trip? Suddenly, 4 cents per mile doesn't look as good. If someone gave me $1,447 to downgrade from business to economy, I would probably take it.
So what to do about airfare if miles aren't the answer? Citi
Rebates - Cash & equivalents
Below is a list of rebate categories and notable credit cards in each category. If this table gives you a headache, do yourself a favor and skip this post and consider just signing up for the Fidelity Investment Rewards Visa card, which pays 1.5% back (2% above $15,000 in spending) on everything you buy or the Fidelity Amex, which gives you 2% cash back on everything you buy. Also, if the card carries an annual fee (e.g. Chase Sapphire, Citi Premier), it might be worth just keeping it simple if your spending in these categories is less than $10,000/year, which is the incremental reward on a 3% vs. 1% that would justify two $100 annual fees.The table of cashback rewards shows mostly cards that have no annual fees, partly because many annual fee cards don't pay off beyond the first-year bonus unless you're a big spender. But I have noted annual fee points and miles cards that are particularly rewarding and worth getting if you spend a lot in these categories. Note that the Amex Blue Cash skims your cashback until you pay out the equivalent of an annual fee and the Costco TrueEarnings requires a paid Costco membership, but who's counting? I also left out cards like the Bank Americard have rewards that are inferior to the Penfed Platinum Cashback Rewards.
^ Requires $6,500 in spending before reaching these payout tiers. Update: This card is no longer offered.
* Comes with a 33% bonus if you also have a Citi Prestige card.
** Bonus categories rotate quarterly but often enough in these categories to warrant mention.
*** Amex small business cards receive cash back from OPEN merchants in addition to the regular rewards program. Unless otherwise stated, this chart assumes regular program pays 1%. However, if you use, say the Costco Business Amex, your payout could be higher.
What you should do today: Assess your spending and see if you spend enough at any of these categories to switch. My favorite is the Citi Forward card for 6.7% back at Amazon.com and restaurants. Don't forget that sign-up bonuses can be substantial, even for these cards that you get for ongoing spending and not just the bonus.
. Amazon offers a program called Amazon Prime, which gives you 
: WaMu offers a 4% online savings account without much hassle. You have to be a WaMu checking customer to get the 4% rate and avoid fees, but the good thing about WaMu is that their checking account is free.
, Verizon, Sprint, or T-Mobile. You can save money on your existing contract or on a new phone:
