How I picked the rewards card that (I think) is right for me
|August 23, 2013|
I’ve been in the market for a new credit card for a while. My credit history suggests I can probably get a pretty good card, so I’ve been scoping out rewards cards for the past few months.
I’m an extreme comparison shopper at heart, and found myself oscillating between cash-back cards and travel rewards cards. On one hand, I like the idea of getting money back on each purchase. On the other, I’d love to snag a free flight.
Ultimately, I decided on an AAdvantage rewards card from Citi. To make my choice, I performed the following steps:
Step 1: Looking at the pros and cons
The first step of my research involved taking a look at the overall advantages and drawbacks of the two major types of rewards cards.
The case for cash-back cards: On CreditCardGuide, we’ve dubbed cash-back cards the most low-maintenance rewards cards out there. Swipe your card and get a small kick-back automatically. Then redeem that cash for a statement credit, a gift card or a deposit into your checking account.
The case against cash-back cards: Rotating rewards categories can make these cards tricky. One month, you’re earning up to 5 percent back at hardware stores. The next month, you’re … wait … you better check your card’s website to find that out.
Travel rewards cards
The case for travel rewards cards: Your everyday spending turns into miles, which you can redeem for a free flight. You can declare your loyalty to a particular airline with a co-branded card that gets you extra perks (such as free checked bags and priority boarding) in exchange for your fidelity. Or, you can get a general purpose travel rewards card that gives you miles that can be cashed in with any airline.
The case against travel rewards cards: Travel rewards are often accused of giving cardholders “funny money” — murky miles that greatly fluctuate in value, based on when you fly. As personal finance blog Seeking Alpha points out, cash-back cards generally give you a pretty consistent 1 percent (a cent for every dollar spent) back. Rewards miles, on the other hand, can be worth less on popular routes during busy travel times.
Rewards site FrequentFlier.com, meanwhile, points out that the glamorous extras touted by airline cards are generally only accessible to elite fliers — not steerage passengers (like me). The BudgetTravel blog, meanwhile, warns that airline cards promise free flights but often nickel-and-dime cardholders for upgrades.
Perhaps the most scathing review of airline cards, however, comes from travel blogger and consumer advocate Christopher Elliott. In USA Today, he criticizes airline cards for trapping loyal fliers with bait-and-switch tactics. The airlines constantly reduce the perks and rewards frequent fliers have grown accustomed to, forcing them to either abandon their hard-earned miles to fly with another airline, or keep crawling back to the airline that takes them for granted.
Step 2: Analyzing my circumstances
So, given the arguments against airline cards, why did I decide to apply for one anyway?? Well, it’s not the cushy perk that attract me, but the free flight, plain and simple. So I chose the AAdvantage card for two reasons:
1. My flight patterns
My airline loyalty over the past several years is split between Southwest, Delta and American. I cashed in a bunch of my Southwest miles recently, so my balance is almost at zero. I have just 5,000 rewards miles with Delta, which isn’t much. Meanwhile, I have 20,000 miles sitting in my AAdvantage account. That’s not enough to get even the cheapest round-trip ticket anywhere. Yet, with the 30,000-mile sign-up bonus the Citi Platinum Select AAdvantage card is currently offering, I’d be looking at a free ticket nearly anywhere in the U.S.
Admittedly, getting a rewards ticket just because I can doesn’t count as saving money. However, I fly to my hometown for Thanksgiving and Christmas. It’s a regular expense I build into my budget. The Midwestern airport I fly into is tiny, and American is one of the few airlines that flies there. Plus, the city I fly out of is an American hub. So If I want to get home, I’m pretty much stuck with American. If I can get just one of those flights for free in 2014, that’s several hundred dollars saved.
2. The numbers added up
Wouldn’t I be better off getting a cash-back card and using the cash toward a flight? That only works out if a cash-back card earns me more money than the airline card. In my case, for the first year of card ownership, it wouldn’t.
Here’s how I ran the numbers:
Cash back: I had my eye on the Capital One Quicksilver card. It offers a constant 1.5 percent cash back on all purchases. Because I don’t spend much on groceries (I don’t have a family) and gas (I live 10 minutes from work), cards offering extra for grocery and gas purchases in exchange for a lower regular rate wouldn’t do much for me. The card also offers a $100 bonus for spending $500 in the first three months and has no annual fee.
Thanks to the spending data I’ve been collecting and the personal finance apps I use, pulling up the average amount I spend each month was relatively easy. Paying rent with a credit card isn’t possible (unless you get creative), so I subtracted that out of my monthly spending. That left me with about $1,000 in spending per month on average.
Assuming I use my credit card for all of that (and get the sign-up bonus), in the first year of card ownership, I would earn:
$180 in cash back + $100 bonus =
$280 in cash back
Not too shabby.
Airline card: Again, because of my flying patterns, I had my eye on the Citi Platinum Select AAdvantage card. It offers 1 mile per dollar spent on regular purchase and 2 miles for American Airlines purchases. It also offers a 30,000-mile bonus if I spend $1,000 in the first three months (I plan to make that spending requirement by charging my tickets home for Thanksgiving and Christmas 2013 by November). The card has a $95 annual fee, waived the first year.
During my first year, I would earn:
$12,000 in earned miles + 30,000 bonus miles =
But that’s not all. Some of that spending will earn me double miles, assuming I buy at least one American ticket in the next year (which I almost definitely will). Plus, I’ll be earning the AAdvantage miles I’d otherwise earn on any American Airlines flights I take. Finally, I’ll finally be able to use those 20,000 miles rotting away in my account.
With all those extras, at the end of next year, I’ll be looking at a balance of about
My tickets home for Thanksgiving are generally pricey: around 50,000 miles, for a ticket worth anywhere between $350 and $500 dollars.
I’d be getting that ticket with my miles, so that’s at least:
$350 saved, if not more.
…That beats my projected cash-back earnings.
The AAdvantage card has a $95 annual fee, waived the first year. So, I’ll either have to cancel the card within a year, or negotiate to have the fee waived another year. My co-worker successfully managed to have her annual fee reimbursed by threatening to cancel, so I’m willing to give that a try myself.
Even if I do keep the card, it’s the sign-up bonus and my current miles balance that really make the AAdvantage card worthwhile. A year from now, I’ll consider getting a no-annual-fee cash-back card and keeping it for the long term.
If there are any rewards aficionados reading, I’d love to hear from you. Is there anything I’m not taking into account? Experiences (good and bad) with your rewards cards you’d like to share? Tell me about it in the comments.