Law of Diminishing Returns
In the United States there are 1.1+ Billion credit cards in circulation, each with their own unique set of rewards and benefits. The reward system can be very complex, discouraging people from spending time understanding the lucrative value they have to offer. Today, we’ll try to breakdown the different ways to earn credit card rewards.
Sign Up Bonus
Most cards have welcome offers, also known as sign up bonus. These sign up bonuses give you a period (first ~90 days) to spend a certain amount of money (~$500 — $5000). The bonus could be anything from cash, points, or miles.
Examples
- Bank of America Custom Cash card offers $200 for spending $1000 in the first 90 days.
- Chase Sapphire Preferred offers 60,000 points for spending $4,000 in the first 90 days.
Let’s skip the discussion on point valuation for this post, and for simplicity’s sake, 60,000 Chase points equates to $750. If your usual or anticipated spend is going to meet the requirement, these sign up bonuses become lucrative.
Reward Multipliers
On top of sign up bonuses, cards can have reward multipliers. First type of multipliers are category based.
- American Express Gold card offers a 4X multiplier on dining and groceries. In other words, for every $1 you spend on dining, you’ll earn 4 Amex points. Again, for simplicity’s sake for now, a $100 dinner would yield $4.00.
Additionally, some cards have multipliers on top of the categories multipliers. These multipliers could be for a variety of reasons, loyalty program, temporary benefit, or partnerships.
- Until Sept 2021 if you had the Amex Schwab Platinum then you could redeem all of your Amex points at 1.25X. This means the 4X you earned on dining is really 5X.
- Bank of America has a loyalty program that lets cardholders earn up to 5.25X on a category of holder’s choice.
Real Life Example
Let’s walk through a real life example of the impact of reward multipliers. We pulled data from the Bureau of Labor Statistics for the breakdown of expenses, but you can run the same simulation with your own spending.
- Dining Out: $3, 600
- Groceries: $4, 700
- Gas: $2, 100
- Entertainment: $3, 100
- Travel: $5, 000
- Non-Category: $10, 000
Yearly Credit Card Spend: $28,500
Single Card Strategy
If you only wanted to use one credit card, then the lowest return anyone should be earning is 2X, and there are so many in the market: Citi, SoFi, Wells Fargo, etc. The math is pretty straightforward, returning $570.00.
Double Card Strategy
Given Travel and Dining are pretty large spend categories, let’s add the Chase Sapphire Reserve (CSR). The card earns 4.5X on travel and dining (including the 1.5x multiplier). Running the math:
- Travel: $5, 000 * 0.045 = $225.00
- Dining: $3, 600 * 0.045 = $162.00
- Everything Else: $23, 500 * 0.02 = $470.00
That’s $856.00, already $287.00 more than the 1 card setup. We know the the CSR has an annual fee, however, it does come with a plethora of credits and other benefits. Again for simplicity’s sake, let’s say the cardholder gets full value from the annual fee.
Triple Card Strategy
Let’s tackle the Groceries and Gas categories next with the Amex Blue Cash Preferred which earns 6X on groceries and 3X on gas.
- Groceries: $4, 700 * 0.06 = $282.00
- Gas: $2, 100 * 0.03 = $63.00
- Travel & Dining: $8, 600 * 0.045 = $388.00
- Everything Else: $16, 700 * 0.02 = $334.00
Wow. That’s a total of $1067.00 which is almost $500.00 more than the one card strategy. Granted the Amex Blue Cash Preferred does have a $95.00 annual fee and without any additional credits or benefits, we can subtract it from $1067.00 for a new reward total of $972.00.
Overall, the three-card strategy is 70.1% more than the single-card strategy purely by looking at the reward multipliers. We haven’t added sign up bonuses, other multipliers, or cards with rotating categories which yields even more value.
Closing Thoughts
What makes things complex are the number of different cards, different earning programs, and the management overhead of everything… not to mention we skimmed over the discussion on the value of points and host of other benefits. The system is multi-faceted and complex, so its easy to miss the full value it has to offer.
P.S. This is not financial advice and I am not your financial advisor.
