If you're new to credit cards, read this post on how to master credit first.
The world of reward credit cards is often murky and over-hyped. The siren song of free first-class travel can quickly trip you into a tangled web of miles, confusing conversion metrics, and difficult redemption policies. Here we're going to cut through the noise and walkthrough my system for determining whether a card is worth holding on to.
Why Use Credit Cards at All?
Paying with credit cards is equivalent to getting 1-5%+ off of everything you buy. It's like the whole world is slightly on sale.
Having played this game for over a decade, I've easily redeemed five-figures worth of free travel.
Benefits > Annual Fee
A lot of people are understandably weary of applying for a card with an annual fee. Why pay for a card, when there's plenty of free options?
This is the heart of the post. Whenever we add a card to our arsenal, the calculus always remain the same:
The benefits of owning the card, should comfortably outweigh the fee.
These benefits fall into one of two categories:
Spending Bonuses
These are rewards you earn for purchases made with your card. Some cards are straight-forward: 1% back on everything you buy. Others are more nuanced: 2% back on gas, 3x points on groceries, etc. Others will rotate their bonus categories every quarter, or even let you pick your own.
As a general rule of thumb, 1 point (1 mile, 1% cash back, etc) is equivalent to 1 cent.
Static Benefits
These are benefits you receive just for owning the card. They can include monthly credits, airport lounge access, etc. They're often some of the greatest benefits of card ownership, as well as being the easiest to quantify the value of.
Determining Expected Value
The math is thankfully fairly straight-forward. We're going to take the face value of a benefit, and then multiply it by the likelihood of us using that perk any given year.
A card can offer $1000 of benefits, at an annual fee of $500, but if we don't use those benefits, they're of no value.
Retail Value of benefits * Likelihood of utilization = Expected Value
An Example
Let's put this methodology to practice by walking through my favorite card - the Chase Sapphire Reserve. This has been my go-to since it launched in 2016 and is still far and away the best credit card, in my opinion.
This card currently carries an annual fee of $550. It's some of the best money I spend all year. Let's find out why.
Start with Static
I like to start with the static benefits since they're the easiest to calculate expected value.
I have no interest in being The Points Guy and updating this post with every perk change, but the process for determining value remains the same. For an up to date list of benefits, go here.
Annual Travel Credit
Chase gives you an annual travel credit of $300. This applies to a broad array of purchases from flights, hotels, Ubers / Lyfts, etc. I've never had any trouble maxing this as they automatically apply the credit to any eligible purchase.
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Value of credit: $300
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Likelihood of use: 100%
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Expected Value: $300
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Cumulative Value: $300
Global Entry
This thing is a godsend for long airport lines. Global Entry not only gets you through customs significantly faster, but it includes TSA Precheck. It has a value of $120 and is good for 5 years.
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Value of credit: $24 ($120 / 5 years)
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Likelihood of use: 100%
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Expected Value: $24
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Cumulative Value: $324
DoorDash
Cardmembers receive a DashPass membership (valued at $10 / month) as well as a $5 monthly credit. I'll confess to using this perk a bit more than may be healthy.
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Value of credit: $180 ($15 / month * 12)
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Likelihood of use: 100%
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Expected Value: $180
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Cumulative Value: $504
Priority Pass
Priority Pass is a popular network of airport amenities spread all over the world. Often, these are airport lounges. Other times, they consist of credits to restaurants in the airport. These offerings can vary drastically in quality - both in comfort as well as in quality of food / drinks.
This perk has grown significantly less valuable to me over the years. The main airports I fly between, Austin and LA, have a combined zero Priority Pass offerings. I'll occasionally take advantage of a meal credit on a tangential journey - maybe once or twice per year. Your mileage may vary. Incredibly, this perk has a retail value of $469 / year.
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Value of credit: $469
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Likelihood of use: 10%
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Expected Value: ~$46
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Cumulative Value: $550
Side note: Chase has been slowly rolling out their own network of lounges, similar to the Amex lounges for Platinum holders.
Misc Travel Peace of Mind
This card also includes various travel perks that I have a harder time quantifying. These include things like: coverages for trip cancellation, lost luggage, and rental cars. As well as zero foreign transaction fees.
I'll holistically value these at a minimum of $50 / year, pushing the value of our static benefits alone to $600 / year.
We've already justified the cost of the annual fee, and we haven't even gotten to the spending benefits yet.
Spending Bennies
The biggest spending benefits for the Reserve come on restaurant and travel purchases. Each of these purchases earn 3x points. All other purchases earn 1x. All points are worth 50% more when redeemed through Chase Travel, so the point range varies from 1.5x - 4.5x.
We'll always err on the side of conservative, so let's say our travel budget per year is $1000. The rest of the year, we're putting $1000 / month of non-travel expenses on the card.
- $1000 * 4.5% = $45
- $12000 * 1.5% = $180
$225 in spending value, plus our approximate $600 in static benefits put us well past the $550 annual fee.
Stronger Together
The beauty of the Chase card system is that all of its cards can work together. The Freedom Unlimited earns a flat 1.5% on everything. The Freedom earns 5% on categories that rotate every quarter. When you transfer these points to your Reserve for a 50% premium, you're now earning a minimum of 2.25% (1.5% * 50%) on everything you buy, and a huge 7.5% back on specific Freedom purchases.
Sign Up Bonuses
Sign up bonuses for any premium card should easily cover the first year's annual fee. If you're unsure if a card is a good fit for you, this significantly lowers the risk of trying it out. If it doesn't work out, you can always product change down to a cheaper card.
Review Annually
Given the volatile nature of the credit card industry, I find it useful to evaluate the cards I'm paying an annual fee for once per year to see if they're still worth holding on to.
Prepare for Launch
Even those who seldom travel can earn significant benefits by simply paying for their regular purchases on credit. Once you've established which cards to use for which types of purchases, the points really begin to add up.
Happy travels ✈️