Credit Card Seminar Pt 3 – The Various Types of Cards and Which Are the Best For You

I certainly hope you are enjoying the series thus far, and I really hope it is opening your eyes to how the credit card system works.  The first two articles were really designed to set the stage for the remaining four.  These last four articles should really begin to show you how to find the right credit cards (in terms of signup offers and ongoing rewards) to finance all or part of your next trip.  Again, here is the series of articles I will be publishing:

  1. Getting Your Credit In Order
  2. What Is the Actual Rate of Return on a Card?
  3. The Different Types of Credit Cards: Cash Back, Fixed Value, and Flexible Point
  4. Why Signup Bonuses Are the Key to Free Travel
  5. What Are the Right Cards For Your Desired Trip?
  6. What Are App-o-Ramas?

In part 2, we got just a glimpse of what we will discuss today.

If you recall, we compared a card such as the Barclay’s Arrival (where we always got 2.2% back on our spend and every earned reward dollar was worth exactly 1 dollar) to a Delta Skymiles card, where each non-Delta purchase earned only 1% in rewards (1 mile per dollar spent) but the redemption value of that mile could vary wildly.  My point in the last article was to teach the concepts of earning ratio and redemption ratio, but today, we are going to extend that and compare (among other things) fixed value reward cards, airline and hotel specific reward cards, and my favorite, flexible point reward cards.

There is one more type of reward card I want to mention as well, but I will not spend much time on it because it’s just not my cup of tea.  It might be for many of you, however, so let’s quickly go over it. 

If I only ever want cash back, this is my card of choice…

 

…but if I want cash or the ability to book expensive international flights, this is my cash back card.

 
Cash back cards – They sound great, and for many people, they are perfect.  A fixed rate of return in a monetary form that is easier to use than any other.  That’s the good news.  The bad news?  That rate of return is typically pretty puny.  Usually, it’s 1%, 1.5%, or 2%, but I have only seen the Fidelity American Express card and Citi Double Cash card offer 2%.  The Big 3 here are the Discover It, the Chase Freedom, and the Capital One Quicksilver.  You can read more about each one here.  Here are the pros and cons of cash back cards:

Pros: These cards generally incur no annual fee, are accepted everywhere (except the Fidelity American Express), and again, offer steady rates of return.  The Capital One card offers 1.5% constantly.  Discover and Chase cards, however, offer 1% back on all purchases, but each quarter feature bonus categories where 5% can be earned (for example, I’m loving the Chase Freedom’s 5% back on dining this quarter).  Finally, I prefer the Chase and Discover cards (if I were going to use only a cash back card) because they also have online shopping portals where I can earn lots of extra cash back.  For example, if I go into a brick and mortar store and buy something using my Freedom card, I will get 1% cash back.  If that same store is accessible via the Chase shopping portal, then I will find that I can get some additional cash back (usually a few extra points) by buying it through the portal.

Cons: The rate of return just is not high enough for my taste when I can get much better going after travel rewards.  Also, the signup offers for these cards are very weak.  Most of them offer $100 cash back after spending $500 in 3 months.  Hey, it’s $100, but if I sign up for the Chase Ink Plus by June 1 (more on this card below), then I can get 60,000 Chase points which can be transferred to United and used for 1 free round trip economy ticket to Europe.  Sure, I have to spend $5000 in 3 months instead of $500, but that’s not a problem for me.  By the way, if you didn’t just read that and say “Hey, wait a minute, free trip to Europe?”, then my writing stinks.

Okay, let’s leave the cash back card world in our rear view mirror (but no offense taken if that’s what you are looking for, especially if you are still establishing or repairing your credit) and look at more rewarding card types.

Fixed Value cards – You have actually already heard about this type of card quite a bit if you read my article on the rate of return from your card.  Remember the Barclay’s Arrival card?  Simple card.  Earn 2.2% back in the form of travel dollars (that can be spent on airfare, hotel rooms, car rentals, cruises) on every dollar you spend.  So, if you spend $10,000 on the card, you’ll get back $220 to spend in travel.  Spend $20,000 on the card?  You’ll get back $440 to spend on travel.  This type of card is remarkably simple to understand, and that simplicity appeals to a lot of people.

Do I like fixed value cards?  Yes and no.  If I could only use one card, it would not be a fixed value card because I could never do business class international travel with the rewards (I would have to spend hundreds of thousands of dollars to get enough in rewards).  On the other hand, a flexible points card like the Chase Ink or Chase Sapphire Preferred will make that trip possible (I promise I will explain how below).  If, however, I use a variety of cards (and I always do), then having a fixed value card definitely has its place in the mix.  Specifically, any category of spending (e.g. grocery, dining, etc.) where I can’t earn more than 1% is a good time to use such a card.

So, who are the best candidates for fixed value cards?  People who like using one card for everything.  People who don’t want to keep track of which categories earn which bonuses.  People who have no desire or need to travel internationally in business class.  If you are a coach airfare person, then fixed value will suit you very well.  Best of all, you don’t have to redeem miles with a specific airline and be held captive by seat availability.  When you earn rewards from a fixed value card, you can use that money on any travel you want.  You simply book it, pay for it with the fixed value earning card, and then redeem the reward afterward as a statement credit.

Okay, last thing on fixed value cards.  The Capital One Venture Rewards card, which I have not mentioned in this series, is NOT the fixed value card I recommend.  There is a new kid on the block, and I personally think it destroys the Capital One card.  Let me formally introduce you to the Arrival from Barclaycard.  Why is it so much better than the Capital One Venture Rewards card?  1) It also earns 2% on every purchase, but when you redeem your rewards, you get a 10% dividend, i.e. they deposit 10% of what you earned back into your account.  So, your effectively getting back 2.2%.  If you don’t think that extra 0.2% matters, then multiply your annual credit card spend by 0.2%.  2) When you apply for a Capital One card, they report the application to all three reporting agencies while Barclay does not.  If you are planning to sign up for lots of cards, this is a big deal.  3) Finally, the signup offer on the Barclay card is just awesome.  Spend $3,000 in 3 months and you will get 40,000 miles.  This is $440 in travel (remember the 10% dividend), just for spending $3000 you would spend anyway.  True story: I applied for and used the Barclay for a few months and was able to pay for over $800 in hotel stays on my trip to Greece using Barclay miles.  Over half of that was just from the signup bonus.  The hotels in which we stayed do not offer their own rewards, so Barclay/Capital One type miles were one of our few options to “pay with points.”  Don’t sleep on the Barclay card, folks, it’s a very solid card.

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Airline and Hotel Specific Cards – Here is where things start to get interesting.  I have signed up for cards from Delta (twice), United, Southwest (twice), and American airlines.  One day I will probably apply for cards from Frontier, Alaska, Lufthansa, British Airways and several more.  I have signed up for cards from Hilton and Starwood, and I will eventually sign up for cards with Hyatt, Marriott, IHG, and more.  Why?  Wrong question.  The real question is why not?  Look, if you read Getting Your Credit In Order, you may recall that I explained how to responsibly sign up for multiple cards.  You can do several at once and then hold off for a while, or you can sign up for these cards slowly over time.  Notice that at no point in this paragraph have I said that I use any of these cards on an ongoing basis, and I don’t plan to.  Their rewards from ongoing everyday spend are just not good enough compared to what I can get from other cards which I’ll describe in the next section below.  But the signup offers?  I will jump on them every time.  Let’s see what I have gotten from these offers:
  • Delta: two different times I have gotten over 30,000 miles.  Those 60,000 miles can get me to Europe and back.
  • United: one signup worth 55,000 miles.  That is also almost enough to get me to Europe and back.
  • Southwest: two signups gave me 100,000 points, and while I can’t do much international travel on Southwest, their domestic redemptions are usually better than Delta, American, and United because while the other three use a minimum 25,000 mile basis for a free round trip domestic ticket, Southwest ties the points required for the flight to the actual airfare.  So, shorter flights require fewer points.  So, worst case is I will get four free round trip domestic flights, but I plan to stretch those points much further.
  • American: one signup worth 50,000 miles.  At certain times of year, that’s two round trip tickets to the Caribbean.  Any time of the year it gets me two domestic round trip tickets.
  • Hilton: one signup for 40,000 points.  Combined with 10,000 points I already had, I was able to get our first night in Athens for free, and it was an awesome hotel.

Okay, do I need to go on?  You should be drooling at this point.  Am I breaking any laws?  No?  Am I abusing a system?  I don’t think so, and here is why.  Let’s use Delta as an example.  When I apply for a Delta card, Delta does not issue it to me.  Their partner, American Express does.  The miles I get when I meet the signup requirements?  They are provided not by Delta, but by American Express.  AMEX bought the miles from Delta, and at a very good rate.  American Express makes money on every transaction I have to make in order to spend the money to get the bonus.  American Express will make a fortune on people who sign up for the card and then fail to pay off the balance completely each month.  They will give miles to people who never get around to using them or who use them on electronics or gifts (a horrendous use of those points by the way).  It’s real simple: the signup bonus is the carrot to get me to apply.  Take away the signup bonus, and I won’t bother with the card.  American Express knows this.  And Delta?  They sell miles to American Express, and many of those miles never get used.

Before I move on to the grand finale (my absolute favorite kind of card), allow me to reiterate that the cards I am describing on this page (even some of the cash back cards) may have high interest rates.  If you cannot be assured of paying off your balance each month, then don’t apply for these cards.


My favorite card…period.

Flexible Point cards – I even love writing that phrase.  These cards are simply the best for me, and I think you will be intrigued by them as well.  Most people are scared away by them because they use “points”, which begs the question “what are these points worth?”  I’ll do my best to answer that for you.

There are three big players in the flexible point space, and I’d like to identify them before explaining how these systems work.  They are: Chase Ultimate Rewards, Starwood Preferred Guest, and American Express Membership Rewards.  The idea is fairly simple: purchases on the cards affiliated with these systems earn you points, and the points can be redeemed in a variety of ways through several different partners.

Let’s look at each program in detail, starting with my favorite.

Chase Ultimate Rewards: Chase points can be redeemed in three ways.  The simpler the redemption method, the less rewarding.  First, these points can be redeemed for cash back.  If you do so, then each point is worth a penny, so that’s a 1% redemption ratio.  Second, you can book travel directly through Chase’s own travel portal (it looks like an Expedia or Travelocity type site).  When you redeem in this manner, you will get 25% more value on your rewards, so your redemption ratio is 1.25%,  The last approach is my favorite, and it’s how I actually pulled off the Greece trip, at least the airfare portion.  Chase has several airline and hotel partners: United, Southwest, British Airways, Virgin, Marriott, Hyatt, and IHG are the primary ones.  Chase allows you to transfer, on a 1:1 basis, any or all of your Chase Ultimate Reward points to these airline/hotel loyalty programs.  So, for example, if I transfer 25,000 Chase points to my United rewards account, I now have 25,000 United miles.  The value of those miles?  Well, that totally depends on how I use them (e.g. flying across the country will give me greater value than flying up the coast).  In my Greece example, I transferred 200,000 Chase points to United and then redeemed those 200,000 United miles for tickets worth $16,000.  That’s a redemption ratio of 8%.  Compare that to the 1 and 1.25% I mentioned earlier, and you understand why this is a staggering example.

To truly maximize your Chase points, you really need more than one card, and that turns some people off.  Personally, I just deal with it, and when I explain some of the category bonuses, you may agree.  I refer to these three cards as the Chase Trinity: the Freedom, the Sapphire Preferred, and The Ink.  We discussed the Freedom  earlier: it earns 1% on every dollar, though every three months there are rotating categories which earn 5%.  Any time you can get 5%, take it.  The Sapphire Preferred earns 1% on all purchases except dining and travel, which earn 2%.  Finally, there is the Ink card, and not everyone will be up for applying for this one.  It’s a business card, so you have to own a business, right?  Well, not in the classic sense.  Lots of people have applied for this as a sole proprietor, meaning you can apply with your SSN as opposed to an EIN (employer identification number).  Your “business” could be babysitting, selling cakes, selling items on EBay, whatever.  My business is this website, and  I was able to use it as a basis for applying for the Ink card.  Here is why I will hang on to my Ink card until someone beats me up and takes it away: 5% back on cell phone, home phone, cable/satellite, and internet.  I don’t even have to carry the card for those as I have them all on autopay.  I do use the card on gas (2% back) and the all powerful office supply stores, where I earn 5% back.  Why is the office supply store such a biggie?  Gift cards.  5% back on all gift cards, which is amazing.  My favorite?  Amazon.  By using the Ink, I get 5% back on every Amazon purchase, and I use Amazon a lot.  So, if I use all three of these cards (and believe me I do), on the right categories, I get a great earning ratio, and as we saw with the Greece example, I have the capability of a staggering redemption ratio.


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Starwood Preferred Guest (SPG): This is an incredibly popular program for two reasons: first, Starwood has properties that people truly aspire to visit (Le Meridien, St. Regis, Westin, W, and others) and second, their points can be transferred to far more airlines (over 30 of them) than the other flexible point programs.  From a hotel standpoint, Starwood is more limited than Chase because Starwood is itself a hotel company (and thus has no interest in letting you transfer their points to other hotel chains), but their own properties are fantastic. 

People also like the simplicity of SPG.  Every dollar you spend (outside of their hotels) earns a point.  Period.  No category bonuses, a dollar always equals a point.  So, you will earn points more slowly than with the other two programs (a 1% earning ratio), but SPG requires fewer points for their hotels than most of Chase and AMEX’s partners (thus a high redemption ratio).  The notable exception is Hyatt, a Chase partner with awesome properties and low point requirements.

Another aspect of the program that people really like is the fact that when you transfer SPG points to airlines, you get a 25% bonus when you transfer 20,000 or more points at a time.  So, for example, if you transfer 20,000 SPG points to Delta, you will actually get 25,000 Delta miles.  Having said that, you will almost always get a better return on your SPG points by redeeming them for hotel stays than for airline miles.  The exception to this rule is if you use the SPG points toward business class international airfare through and airline transfer of points.

Two last options that I think makes SPG a great program: first, when you stay 5 nights at a property using points, the 5th night is free.  Second, you can book many stays using a combination of cash and points, which allows you to stretch your SPG points further.

Let me give an example to show how valuable SPG points can be, and this will resonate with my Orlando friends.  When people go to Disney World, they love to stay “on property.”  This means The Polynesian, The Grand Floridian, The Boardwalk, and lots of other hotels I would never book because I don’t spend enough time to get the value for the high prices those hotels charge.  But, there are two properties which are on Disney property, are desired by lots of visitors, but which are not operated by Disney.  They are the Swan and the Dolphin.  They are close to EPCOT and provide almost all of the same benefits a “Disney” hotel offers.  They are actually owned and operated by, you guessed it, Starwood, so you can use SPG points for hotel redemptions there.  Now, during peak times of year, those hotels can easily go for over $300 a night.  They require 10,000 SPG points per night.  That’s a terrific 3% rate of return.  If you stay 5 nights, then it’s $1500 in value for 40,000 points (remember 5th night free), which takes it up to a tremendous 3.75% rate of return.  Just for comparison, Marriott (a Chase Ultimate Rewards partner) may require 25,000 points for a hotel that goes for under $100 a night.  If I do choose to use Chase points for hotels, then Hyatt is the way to go.

There are only two SPG earning cards: The SPG personal card and the SPG business card.

Are you starting to see why flexible point programs are where I try to put all of my spend?  Let’s keep going.


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American Express Membership Rewards: This is my least favorite of the three programs, but that is akin to saying “Mercedes is my least favorite luxury car.”  The program is very similar to Chase Ultimate Rewards, and in fairness, Chase absolutely borrowed American Express’s model and then tweaked it (and I love their tweaks).  The idea, again, is that you earn points and can use them in different ways.  First, and please don’t do this, you can do a statement credit with your points.  The problem is that the rate is awful, less than a penny per point unless you have a Membership Reward card that charges hundreds of dollars a year in annual fees.  Second, you can “pay with points.”  The idea is similar to the Chase portal I described above, but you will only get a penny per point (1% redemption ratio) this way (though you will earn miles/points on your redemptions if you go this route).  Remember, by comparison, Chase gives a 1.25% redemption ratio on travel booked through their site.  As was the case with Chase, the ideal way to use American Express Membership Rewards points is by transferring those points to their partners, which include Delta, British Airways, Virgin, Hawaiian, and several non-US based carriers.  Their hotel partners are nothing to write home about: Hilton, SPG, and Best Western are quality chains, but the transfer ratios are not so great.

The main reasons people love this program are: first, unlike SPG, you can earn points faster because the AMEX cards do offer category bonuses, with the most common ones being on groceries, gas, and airfare.  Second, they occasionally offer transfer bonuses, such as a 50% transfer bonus when transferring to British Airways.  Since the economy has improved a bit, however, these transfer bonuses have been much less common.  Finally, there airline partners provide a stronger list than Chase, especially for those who live in cities with a strong Delta presence.

There are lots of cards which earn Membership Rewards, but the most popular are the Premier Rewards Gold, the Platinum, and the Everyday (Tina Fey advertises this one).  The Premier Rewards Gold offers 3% on airfare, which can lead to huge returns for truly frequent flyers, as well as 2% on gas and groceries.  The Everyday is offered in both annual fee and no annual fee versions.  The no annual fee earns 2% on groceries and 1% on everything else, but if you make more than 20 transactions in a month, all of your points for that month get a 20% bonus.  With the annual fee (known as the Preferred version), the bonuses are 3% on groceries and 2% on gas, but with 30 transactions in a month, you will get a 50% on your earned points, which is fantastic.

Here is one last summary of the three flexible point programs, with pros and cons:
Chase Ultimate Rewards:
Pros: sensational signup offers (40,000 on the Sapphire Preferred, 50,000 on the Ink), great bonus categories (5x on rotating categories with the Freedom, 5x on internet, satellite/cable, phone, and office supply store purchases with the Ink), excellent transfer partners (especially United, Southwest, and Hyatt), reasonable annual fees on cards

Cons: no grocery bonus on any card (which for families is a big loss), not much else to complain about

SPG:
Pros: Some of the best hotels and hotel redemption possibilities out there, a huge list of airline transfer partners, reasonable annual fee
Cons: The lack of bonus spend categories is hard to stomach

American Express Membership Rewards:
Pros: Lots of good airline partners, lots of cards with strong grocery bonuses, excellent signup bonuses
Cons: AMEX not accepted everywhere, very high annual fees on cards

Now, that’s my overview of the various types of cards, and as you can see, there are a bunch of them.  You may want to read this article a couple of times to highlight what gets your attention the most, and then see which cards meet your needs.  You may also want to wait until I finish the series before you do anything, just so you have a total picture. 

Until next time, thanks for visiting.

As always, feel free to share your comments and questions.

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