This is a post about optimizing credit card points and cash back. This is not a “churning” post; while I care about sign-up bonuses, I don’t try to optimize signing up for new cards specifically for the bonus. Instead, I focus on which cards maximize return on spending, usually expressed in cents per dollar or just percent returned. Using this process, I estimate my partner and I return about $0.06-$0.08 per dollar spent on credit cards.
If you appreciate this post, stick around to the end for my referral links.
In brief
The general formula to decide if I should add a new card is:net marginal benefit - net cost > $0
The core of this methodology is to determine the net marginal benefit of a new card compared to its net cost. Let’s consider a hypothetical card that returns 3% cash back on dining for a $100/year fee. A naive, non-marginal calculation would say something like “this card gets 3% cash back on dining, and I spend $6k/year on dining, so it’s worth it since the yearly fee is less than $180.” However, that ignores that your $6k/year was already earning, say, 2% cash back on the (free) Citi Double Cash – worth $120 per year. So the benefit of this card is actually only an extra $60/year. You’d need to spend $100/(0.03-0.02) = $10k/year on dining for this card to be worth it.
Aside # 1 – valuing points
Most cards I’ll be discussing don’t give you straight cash back that’s easy to compare between cards. Instead you get Credit Card points (Chase UR, Amex MR, etc), airline miles, or hotel points. So to compare between the different programs we need some point->dollar conversion.
There are two ways to do this. The first, easier method is to use the point valuations from The Points Guy. I find these to be pretty reasonable if you’re wiling to spend some effort to maximize your point usage, eg by looking for high-value airline redemptions.
The other option, that will probably only work for credit card points (ie not airlines or hotels) is to figure out how many cents per point you can directly redeem points for. This also gets complicated for Chase and Amex. Chase is $0.01/point if you don’t have a Sapphire card, $0.0125/point if you have a Sapphire Preferred, and $0.015/point if you have the Sapphire Reserve. Amex is usually $0.006/point, but could be $0.011/point if you have the Schwab Platinum card.
Net cost
The next step for evaluating any new card is to figure out the net cost: basically, the annual fee minus any credits that you’ll actually use. Some credits, like the Chase Sapphire Reserve annual travel credit, are easy to use so they directly reduce the net annual cost. Other credits, like the Amex Platinum Walmart+ credit, I don’t use at all, so they don’t get counted. Still other credits fall in the middle (Amex is really good at this): while I do get a benefit from Amex’s $200/year hotel credit, or $100/year Saks credit, or $200/year airline credit, it’s money that I probably wouldn’t have spent otherwise, so I give them a fractional multiplier. For those listed Amex credits, I value them at 50%.
Let’s work a couple quick examples: the Capital One Venture X and the Amex Platinum.
First, Capital One’s Venture X. This card has a $395/year fee. Right off the bat, it has a $300/year travel credit. This credit is only actually worth $270 to me – if I had spent that $300 on my preferred travel card (Amex Platinum), I’d have received 5 points per dollar, or $0.10 back per dollar spent, so I need to account for losing $30 in points by not spending that $300 on the Platinum. Next, this card gives 10,000 points every year after having it for a year – worth $185 (10,000 points * $0.0185/point = $185). I ignore the pre-check credit because almost every card offers it now. So the net cost for this card is $395-($270+$185)=-$60 – that is, this card has positive expected value without any spend, as long as you spend $300 through the Capital One Travel portal.
Next, the Amex Platinum. This card has a long list of possible credits, so the actual net cost will vary a lot from person to person. To start, it has a $695 annual fee(!). I’ll go through the credits and include what I value them at:
- $200 hotel credit – worth $100/year because it usually encourages me to get a more expensive hotel than I would otherwise; I technically miss out on points from the Venture X doing this, but that’s canceled out by the (usually) $100 experience credit attached to booking a hotel that qualifies for this credit
- $240 digital entertainment – worth $180/year because I only actually have $15/month in subscriptions that use it, but I also need to subtract $6.50 for points from other cards
- $155 Walmart+ – worth $0; I don’t ever shop at Walmart
- $200 Uber – worth $180 because I do actually use that much Uber with or without this card, but I also sometimes forget to use it, and then I need to subtract $6.50 for points I’m missing from other cards
- $200 airline fee credit – worth $100 because I usually spend this on preferred seats that I wouldn’t buy otherwise, but I need to subtract $10 for the missing points
- $300 equinox – worth $0, I don’t use this
- $100 Saks – worth $50, since I get a couple nice things for free but I wouldn’t buy them otherwise, and then I need to subtract $2
- $189 Clear – worth $100 because Clear is actually really convenient, but also I wouldn’t buy it otherwise, and then need to subtract $3
Overall, the benefits come out to $710 and the cost from missing points comes out to about $28. So the net cost comes out to $695-$710+$28=$13/year. I’d need to have enough spending to get a net marginal benefit of more than $13/year for this card to be worthwhile.
Net Marginal Benefit
I briefly described this above, so I’ll go into a lot more detail now. This part depends quite a lot on your personal spending patterns, so if you plan to continue I’d suggest getting a rough idea of how much you spend per year in the following categories:
- Groceries
- Restaurants (& food delivery)
- Airfare
- Hotels
- Rental Cars
- Everything else
Some cards also have relatively niche categories, like Lyft or Tock.
Figuring out what credit cards to use is ultimately an optimization problem. I’d recommend solving it iteratively, just getting one new card at a time.
Starting point
If you’re starting from scratch, you need a free starting point to build from. There are a few options that give 2% across the board for free. As a next step, I’d suggest the Capital One Venture X. As shown above, as long as you have $300/year in travel expenses it’s better than free. It also gives you $0.037 per dollar spend (2 points per dollar, 1.85 cents per point) in “everything else”, $0.185 per dollar on hotels and rental cars (if you go through their portal), and $0.0925 per dollar on airfare (again, provided you go through their portal).
If you’re totally in the Chase ecosystem, wouldn’t use the Venture X travel credits, or only value Capital One points at 1 cent per point, the Chase Freedom Unlimited card is a good alternative “everything else” card. It’s free and gets 1.5x points on everything, which comes 2.25 cents per dollar spent if you have the Chase Sapphire Reserve.
Groceries and Dining
Next, I personally add the Amex Gold card. It gets 4x points ($0.08 per dollar spent) on restaurants and groceries and 3x points ($0.06 per dollar spent) on airfare. That’s an additional 4.3 cents per dollar spent on dining+groceries and 2.3 points per dollar spent directly with airlines (if you don’t want to go through the Capital One portal). To round out the net cost: this card costs $250/year and gets $120/year in Uber credits, for a net cost of $130 (it also gets $10/month dining credit at restaurants I never go to, but if you do then it’s only a net cost of $10/year). So you’d need to spend $130/0.043=$3025/year (or $252/month) on dining and groceries for this card to be worth adding.
Some other options for dining are the Chase Sapphire Reserve or Preferred or Citi Premier card. Another option for groceries is the Amex Blue Cash Preferred, which gets 6% cash back (not points) on groceries.
Aside #2 – rotating categories
I categorically avoid cards with rotating bonus categories, such as Discover cards or the Chase Freedom Flex card. It’s mostly to avoid having to think about not just what category I’m spending in, but also what quarter or month it is when I pull out a credit card.
Travel
Next I’d consider a premium travel card (beyond just the Venture X): either the Chase Sapphire Reserve or Amex Platinum. I’ve already talked about the Platinum at length, so I’ll round it out here. It gets an additional $0.0075 per dollar spent on airfare, but also has the huge benefit of giving points for booking directly with airlines. As I worked out above, its net cost (for me) is $13/year, so this makes sense if I spend more than about $1750/year on airfare.
Airline and hotel cards
In my opinion, it’s actually really hard for an airline or hotel card to beat out a generic premium travel card. You’re almost certainly getting worse value than Chase or Amex (the best United card gets about 4.4 cents per dollar spent; the best Delta card gets 4.23 cents per dollar spent). Hotel cards might be worthwhile for the complementary status perks if you can commit to one brand, but I haven’t done tons of research on that yet.
Brand specific cards
Lots of companies have their own brand-specific credit card: Amazon, Target, Costco, etc. You can follow the same “net marginal benefit minus net cost” methodology to analyze those.
Aside #3 – Bilt Rewards card
The Bilt Rewards card gives you 1x points (1.8 cents per dollar spent) on rent. This could be worth it for a lot of people, and has a huge benefit of being one of the only cards with American Airlines as a transfer partner. However, I don’t use it for three reasons:
- It requires 5 transactions per month on the card – it wouldn’t be too hard to set up a few low-cost recurring subscriptions, but it would also be annoying to keep track of
- It’s Wells Fargo – I’ve never heard anyone have a good experience with Wells Fargo
- Personally, I really don’t want to mess up rent – my partner and I have a pretty good relationship with our landlord, and part of that is a check shows up every month exactly on time without any trouble (thanks to Capital One bill pay)
Conclusion? And referral links
The landscape of rewards cards changes quite frequently; between that and changing spending habits, it’s worth revisiting your setup every 6-18 months.
To conclude, here are referral links to cards that I currently have. Especially with the Amex cards, check what they offer in terms of signup bonus in an incognito window, because sometimes they give better targeted offers than what you get through referrals.
- Amex Platinum – 80,000 points if you spend $6k in 6 months (also google this card in an incognito window to see if they give you a targeted 125k-150k offer)
- Amex Gold -60,000 points if you spend $4k in 6 months (also google this card in an incognito window to see if they give you a targeted 75k-90k offer)
- Amex Blue Cash – $200 credit if you spend $2k in 6 months
- Chase Freedom Unlimited – $200 credit if you spend $500 in 3 months
- Capital One Venture X – 75,000 points if you spend $4k in 3 months
- United Cards – this link appears to be for any United card, and the signup bonuses seem to be the same as what’s offered elsewhere