Monday, January 21, 2013

Wading into the Credit Card Signup Bonus Game

Each January I find myself taking the opportunity to assess our financial situation to see if I'm doing everything I can to make the most of our good fortune. After exploring the world of credit card signup bonues the past couple months I've found that I was leaving a significant amount of money on the table utilizing a mostly cashback approach to credit cards.

With a little work, I don't think it's too hard to earn roughly 10% of one's annual income in nearly free travel by navigating the credit card signup space effectively.

Here's how I came to this conclusion...

Family vacations are something I think about every day, and one thing that's been bothering me lately is the escalating cost of airfare. Relatively mundane domestic tickets with reasonable advanced notice were coming in at more than $400 per ticket. Rip off!

With 4 tickets to buy each time we take a family trip, a swing of a $100 or $200 per ticket can have a huge impact on the cost of our vacations. And being blocked from attaining family vacations is something this deal hound will not tolerate. :)

With this in mind I thought to reassess my longstanding aversion for miles/points based credit cards. My preference for the past few years has been cashback based cards. For quite a while I was happy with the American Express Blue Cash card in conjunction with a Chase Freedom Visa. Neither carry annual fees, and they each offer between 1 and 5% cashback. The AmEx offered 5% back on gas, groceries and drugstore purchases and 1.5% back on all other purchases once $6,500 in annual spend was achieved (1% prior to that). The Chase Freedom offered 5% back in rotating quarterly categories and 1% on everything else.

The main thrust of this strategy was to:
  1. Avoid annual credit card fees
  2. Maximize cashback by placing spend on the optimal card
  3. Use that cashback to reduce credit card bills
That seemed to work pretty well for us for a while. Things weren't overly complicated. You just needed to pick the best card for the purchase and in all you'd potentially drive your overall cashback north of 2%.

I'd estimate that about a third of our gross income was being funneled through credit card purchases. To share an example of how beneficial (or not) this approach was, for an annual income of say $100,000 about $3,000 per month ($36,000 annually) was going through credit cards. Of that $36,000 if we earned 1% cashback we'd get $360.

If we were really savvy and aligned our purchases with 5% cashback categories frequently we'd bring in 2-3% of $36,000 each year - about $700-$1,000 annually. This was a nice clip for not doing much of anything really so I thought we were doing pretty well.

Until I looked at what we might be leaving on the table by not taking advantage of credit card signup bonuses.

About a year ago I saw an offer pop up for a Capital One Venture credit card that paid a $1,000 signup bonus. Wow! By merely changing the card we used we'd earn $1,000 plus the card offered 2 "points" per dollar. Each point could be used to "erase" travel purchases which was virtually a cash equivalent for us so this card was a great one for us for the past year. It carries an annual fee after the first year but at this clip it was worth it because it effectively increased our average cashback percentage. So I was inclined to stick with it for another year.

But I was hungry for more lucrative signup bonuses like this one.

Even the Venture card doesn't offer a 100,000 point signup bonus any more. I think it's down to 10,000 points. As I looked around I found a number of moderately attractive signup bonuses, but they were mostly for airline/hotel cards and programs like Chase Ultimate Rewards and AmEx Membership Rewards.

I'd grown skeptical about miles/points based programs because the provider can devalue the points at any time by changing the terms of the program. And finding flights/rooms when you want them for a reasonable amount of points can be elusive.

I also wondered why anybody in their right mind would prefer points vs. cashback.

But in looking at this game closely over the last couple months I've come to understand how earning points can indeed be more lucrative than cashback. And how signup bonuses can be worth more than either.

By applying a variety of techniques in the example $100,000/$36,000 scenario I described above I think it is/would be fairly easy to go from $1,000 cashback to an effective $10,000 back in nearly free travel realized through a combination of credit card signups and other techniques.

10x leverage - that gets my attention.

Further Reading: Lessons learned on the way to 270,000 miles and points

Here are some concise and helpful resources which I think would be useful in quickly getting up to speed on how to navigate this interesting space:
The Points Guy:
If you're thirsty for more the next action I'd recommend is subscribing to the collective blogs in your feed reader.

And if you've really got it bad poke around the FlyerTalk forums.

I'll look forward to discussing this further. I'd love it if you subscribed to Casa Dwyer for future updates.
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