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 universe works. The first two articles were really designed to set the stage for the remaining three. These last three 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 list of articles in the series:
- Getting Your Credit In Order
- What Is the Actual Rate of Return on a Card?
- The Different Types of Credit Cards: Cash Back, Fixed Value, and Flexible Point
- Why Signup Bonuses Are the Key to Free Travel
In part 2, we got just a glimpse of what we will discuss today.
If you recall, we compared a card such as the Citi Double Cash (where we always got 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%. My friends at The Simple Dollar have a great list of cash back cards. My simple strategy for those who want a pure cash back experience: Get the Citi Double Cash, the Discover it, and the Chase Freedom. Make the Double Cash your default card, and then utilize the Freedom and DIscover cards only for the categories in which you earn 5% back. Those categories will change every three months, but 5% is awesome.
Fixed Value cards – Examples include the Barclay Arrival Plus and Capital One Venture cards Simple cards. Earn 2 miles on every purchase. Each mile is worth 1 cent, so effectively you are earning 2% cash back, but it must be used for travel. Given that the Citi Double Cash offers 2% back in the form of actual cash and has no annual fee, I prefer it to these other two cards. BUT, the signup bonuses on both the Venture and the Arrival Plus are too good to pass up. The arrival offers $500 in travel after spending $3000 in 3 months, and the Venture offers $400 in travel after spending $3000 in 3 months. Get them for the bonus, but after the first year, I’d prefer to a 2% cash back card to these cards.
Airline cards offer not only miles, but also free checked bags and faster tracks to status
Airline and Hotel Specific Cards – Here is where things start to get interesting. I have signed up for multiple cards from Delta, United, Southwest, 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, Hyatt, Marriott, and IHG. 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 some of these offers:
- Delta: two different times I have gotten over 50,000 miles. Those 100,000 miles can get me to Europe and back with 40,000 miles to spare.
- 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.
- Hilton: one signup for 2 free nights. I used that for a weekend in NYC at the Waldorf, which would have cost over $400 a night.
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 on the planet
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 four 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, American Express Membership Rewards, Citi Thankyou Points, and Starwood Preferred Guest . 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% (note: it’s a whopping 1.5% if you have the Chase Sapphire Reserve. 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, 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 due to their differing category bonuses, and that turns some people off. Personally, I just deal with it,
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 Chase Ultimate Rewards points, American Express Membership Rewards points, or Citi Thankyou points. 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 an 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 Universal / Disney 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 12,000 SPG points per night. That’s a terrific 2.5% rate of return. If you stay 5 nights, then it’s $1500 in value for 48,000 points (remember 5th night free), which takes it up to a tremendous 3.1255% 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.
Membership Rewards have been around for a very long time…and they are worth exploring.
American Express Membership Rewards: 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, far less than a penny per point. 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. Finally, there airline partners provide a longer list than Chase. 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 Citi Thankyou Premier
Citi Thankyou Points: The new kid on the block. Citi has revamped their program, and it is a solid program. I still prefer Chase and AMEX, however, simply because of their transfer partner list. Thankyou points can be redeemed for cash back (bad value), transferred to partners (potentially excellent value, though they do not have a domestic airline partner, much to people’s chagrin), and they can be redeemed for 1.25 cents per point (solid value) for travel booked through Citi, provided you have an annual fee bearing card (Thankyou Premier or Prestige).
You may want to read this article a couple of times to highlight what gets your attention the most, and then see which card types 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.