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Valued Member

## Credit Card Points & Opportunity Cost

I'm curious if anyone else thinks of the opportunity costs when it comes to earning points and comparing the earning potential of various credit cards. I took a lot of economics classes in undergrad, so my brain is pretty much hardwired to think this way now. One of the times that I think about the opportunity cost is when I consider getting a card with an annual fee. Here's an example of what I have been thinking:

I currently have an Amex ED, and have accrued a large amount of points thorugh the card due to regular spending. Due to my spending habits, Amex has given me an offer (25k points with \$1k spend in 3 months) to get the Amex PRG. I have thought about getting the PRG in order to increase my points earning potential. As we all know, the Amex PRG has an annual fee of \$195 after the first year. The waived annual fee and sign up bonus makes the offer great for the first year, but what about after the first year? Assuming I can get to do the gift card trick to take away the \$100 credit for incidentals, I am still left with the remaining \$95 of the annual fee.

Giving general figures based on my typical spending, let's say my annual spending breaks down to:

Airlines: \$500 = 1,000 points with the ED (given 2x on Amex Travel), and 1,200 points with the PRG (we took away \$100 with the gift cards) - A net gain of 200 points

Groceries: \$3,600 = 7,200 points with both the ED and PRG - A net gain of 0

Gas: \$900 = 900 points with the ED, 1,800 points with the PRG - A net gain of 900

Restaurants: \$1,200 = 1,200 points with the ED, 2,400 with the PRG - A net gain of 1,200

All Else: \$1,800 = 1,800 with both the ED and PRG - A net gain of 0

Annual points with ED = 12,100 points (not factoring in the 20% extra due to the ease of calculation, but I have always gotten the 20% extra every month)

Annual points with PRG = 14,400 - A net gain of 2,300 over the ED

Many would say that I paid off the PRG annual fee, and then some. After all, I got 14,400 points with the PRG, and at the conservative estimate of 1 cent per point, I got \$144 worth of points. This is well over the \$95 annual fee. However, when I factor in the opportunity cost of what I would have earned with the ED (12,100 points for no annual fee, thus "free"), I only gained 2,300 points with the PRG. At 1 cent per point, this means that I am only erasing \$23 of the \$95 annual fee (\$46 of \$95 with the Points Guy valuation of 2 cents per point). In my mind, it actually costs me more to have the PRG when compared to the ED.

Now I probably just bored many people out of their minds, but I wanted to give an example of what my thought process is when considering cards with an annual fee. Is my argument flawed, or does it follow? Am I the only person that thinks this way, or am I in good company?

My cards are shiny
Shiny plastic in my hands
Shiny plastic cards
Message 1 of 11
10 REPLIES
Super Contributor

## Re: Credit Card Points & Opportunity Cost

I wouldnt be suprised if very card you get or have has a purpose down to decimal
Message 2 of 11
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Established Contributor

## Re: Credit Card Points & Opportunity Cost

I think that way also.  I like to calculate and analyze things a bit more to get the truth rather than take things at surface value.  Things that seem like a good deal are not always.

Message 3 of 11
Valued Contributor

## Re: Credit Card Points & Opportunity Cost

perhaps you may take advantage of a Amex offer, once or twice,  that may not be offered on your existing card, this could add a few more dollars.

your credit score might also increase because UTL on the card is not included in your score. Which can also allow you relax a bit when it comes to watching your balances.

your limit will most likely be much higher on the PRG card.

Cards: Chase Southwest 20k & CSR 10k & CSP 10k & Freedom 6.6k & Amtrak/Freedom 4.6k, FNBO DISC 25.1k Oregon Duck 5k, & AMEX BCP 15k & Hilton Surpass 7.5k & Delta Gold 6k & Zync NPSL, Fidelity AMEX 17k Commerce5.9k & Cash Forward 7.5k & Sams Club MC 10k, Paypal Extras MC 7.5k, CapOne Venture 15k, QS 2.5k, QS 750, Amazon 5.9k, Walmart 10k, Citi Simplicity 9k, Discover IT 16k and a nice stack of store cards.
Last APP/HP 5/15/2017 Marcus Loan. 30k
Message 4 of 11
Valued Member

## Re: Credit Card Points & Opportunity Cost

Til-hey-ra wrote:

I'm curious if anyone else thinks of the opportunity costs when it comes to earning points and comparing the earning potential of various credit cards. I took a lot of economics classes in undergrad, so my brain is pretty much hardwired to think this way now. One of the times that I think about the opportunity cost is when I consider getting a card with an annual fee. Here's an example of what I have been thinking:

I currently have an Amex ED, and have accrued a large amount of points thorugh the card due to regular spending. Due to my spending habits, Amex has given me an offer (25k points with \$1k spend in 3 months) to get the Amex PRG. I have thought about getting the PRG in order to increase my points earning potential. As we all know, the Amex PRG has an annual fee of \$195 after the first year. The waived annual fee and sign up bonus makes the offer great for the first year, but what about after the first year? Assuming I can get to do the gift card trick to take away the \$100 credit for incidentals, I am still left with the remaining \$95 of the annual fee.

Giving general figures based on my typical spending, let's say my annual spending breaks down to:

Airlines: \$500 = 1,000 points with the ED (given 2x on Amex Travel), and 1,200 points with the PRG (we took away \$100 with the gift cards) - A net gain of 200 points

Groceries: \$3,600 = 7,200 points with both the ED and PRG - A net gain of 0

Gas: \$900 = 900 points with the ED, 1,800 points with the PRG - A net gain of 900

Restaurants: \$1,200 = 1,200 points with the ED, 2,400 with the PRG - A net gain of 1,200

All Else: \$1,800 = 1,800 with both the ED and PRG - A net gain of 0

Annual points with ED = 12,100 points (not factoring in the 20% extra due to the ease of calculation, but I have always gotten the 20% extra every month)

Annual points with PRG = 14,400 - A net gain of 2,300 over the ED

Many would say that I paid off the PRG annual fee, and then some. After all, I got 14,400 points with the PRG, and at the conservative estimate of 1 cent per point, I got \$144 worth of points. This is well over the \$95 annual fee. However, when I factor in the opportunity cost of what I would have earned with the ED (12,100 points for no annual fee, thus "free"), I only gained 2,300 points with the PRG. At 1 cent per point, this means that I am only erasing \$23 of the \$95 annual fee (\$46 of \$95 with the Points Guy valuation of 2 cents per point). In my mind, it actually costs me more to have the PRG when compared to the ED.

Now I probably just bored many people out of their minds, but I wanted to give an example of what my thought process is when considering cards with an annual fee. Is my argument flawed, or does it follow? Am I the only person that thinks this way, or am I in good company?

No your argument is sound, ED and EDPs are known to be at or near the very top of the chart of "rewards earning potential", esp. when given the assumption of 'only 1 card allowed'.

Also, I think 'Opportunity Cost' in this interpretation is already used by most when they are contemplating on cards or combo of cards as besides 'if my spending pattern is this, how much could I get back from A vs how much could I get back from B' there's little else to compare in terms of rewards earning potential.

However, while number A > B so A is of course better seems like an elegant solution, I think to solve this problem accurately one would need to model all the possible card combos, available benefits(perks), churn, MS, personal preferences under a moving 'frame of reference' driven by constantly changing economic conditions, loyalty program rules, credit card offering landscape and of courses the uncertain future changes in one's own life or in the lives of people close to one. This seems overwhelmingly complex at least in the near future even with all the "big data" hype, though it might shed light on why B could be better, after all.

btw. PRG's best sign up is 50K so in general not a good idea to accept the 25K lowball offer

Message 5 of 11
Established Contributor

## Re: Credit Card Points & Opportunity Cost

I have 3 AF cards. I did that exact analysis with all three. As you said - it makes sound economic sense to do so.

Over \$182,000 in credit across 12 cards.

FICO ranges from 786 -818 as of 6/17/2017
Message 6 of 11
Super Contributor

## Re: Credit Card Points & Opportunity Cost

Basically always compare alternatives, so I have many times argued against the simple "pays for itself" test, and said the "proper" question is more like:

"Are the total rewards I will get from card X greater than the total rewards I could get from any other card I can reasonably expect to be approved for" with examples like the LTL Bank card that offers 0.1% rewards with a \$1AF, which after a mere \$1000 spend pays for itself but would still be a horrible choice!

So, I agree with OP!   You can also extend the analysis futher.   Take the high AF cards, with AF of around \$400.   It might be that you could do something non cc-related with that \$400 that would outpace the total rewards of say the CSR.   In which case the answer would be don't get any new card.

Message 7 of 11
Valued Member

## Re: Credit Card Points & Opportunity Cost

jamesdwi wrote:

perhaps you may take advantage of a Amex offer, once or twice,  that may not be offered on your existing card, this could add a few more dollars.

your credit score might also increase because UTL on the card is not included in your score. Which can also allow you relax a bit when it comes to watching your balances.

your limit will most likely be much higher on the PRG card.

Very good point! That could certainly change the calculation. For the sake of the argument, as long as the offer does not increase spend and pushes one above the 9,500 point threshold (above what would have been made with the ED) to make the remaining \$95 of the annual fee worthwhile.

Additional card benefits and the score bump would also add value. One would just need to calculate what they view the dollar value of those benefits to be.

My cards are shiny
Shiny plastic in my hands
Shiny plastic cards
Message 8 of 11
Valued Member

## Re: Credit Card Points & Opportunity Cost

longtimelurker wrote:

Basically always compare alternatives, so I have many times argued against the simple "pays for itself" test, and said the "proper" question is more like:

"Are the total rewards I will get from card X greater than the total rewards I could get from any other card I can reasonably expect to be approved for" with examples like the LTL Bank card that offers 0.1% rewards with a \$1AF, which after a mere \$1000 spend pays for itself but would still be a horrible choice!

So, I agree with OP!   You can also extend the analysis futher.   Take the high AF cards, with AF of around \$400.   It might be that you could do something non cc-related with that \$400 that would outpace the total rewards of say the CSR.   In which case the answer would be don't get any new card.

Exactly! After reading through my post again, I realize I did not make that point clear in my post. Whoops...

Indeed, I am arguing against the "pays for itself" test. Seeing that test being used so often, and on many more blogs and forums than MyFico, is why I wanted to write a post about the opportunity costs. That test being used just to look into how points/miles accrued could pay off the annual fee is why I only focused on points in my post.

My cards are shiny
Shiny plastic in my hands
Shiny plastic cards
Message 9 of 11
Super Contributor

## Re: Credit Card Points & Opportunity Cost

Actually, at that level of spend, if you used a Capital One Quicksilver, you'd be getting \$120 straight up cash back, useful anywhere, with no AF. The annual fee on the PRG does give you also no FTF, but the Quicksilver (no AF) also gives you no FTF. The PRG, if optimized, might get you 16,000 MR in this case, and 16,000 points, frankly does not go very far in transfers to airline partners. So with the \$95 AF you actually have to go two years of spend to get a decent amount of points, taking away a large portion of the points value. The bonus is nice, but might better be waiting for a 50k MR PRG bonus.

I think from your followup comments you see/agree the "pays for itself" is questionable, and I agree that other factors can make the AF worthwhile. I myself have too many AF cards, but for now I think they provide some benefits I use, either for the travel benefits or for the available credit. My Quicksilver lurks in the background, smirking at me as I try to get better value from other cards.

For many people who spend a fair amount of time trying to optimize small spend on travel cards, they really aren't getting much more than what the Quicksilver offers, through the course of a year.

High Bal Jan 2009 \$116k on \$146k limits 80% Util.
Oct 2014 \$46k on \$127k 36% util EQ 722 TU 727 EX 727 FICO Simulator 2014: \$20k balances = 812 FICO.
March 2017 \$20k on \$300k 6% util EQ 824 TU 824 EX 815

5 / 24 counting down to 1 Nov 2017... wait I guess it's 18 Dec 2017 to get 4/24
Message 10 of 11