Tuesday, August 12, 2014

The rewards credit card shuffle

Last week, I came across an article at Money Talks News with the somewhat cumbersome title, "No Rewards Credit Card in Your Wallet? You're Likely Missing Out Big Time." I clicked on it mostly out of idle curiosity, not expecting to learn anything from it that I didn't already know. After all, I currently have two rewards credit cards in my wallet—one Citi Dividends and one Chase Freedom—both of which pay me 1 percent cash back on all my purchases, plus an additional 4 percent on specific categories that change quarterly. To make sure I get the most out of my rewards, I jot down these categories on a crib sheet in my wallet, so I can always use the card that pays the highest bonus at any given location. And, of course, I always pay off the balance on all my cards in full, so the 5 percent cash back is really 5 percent and not just a discount on an interest rate of 15 percent. So all in all, I thought I was doing a pretty good job gaming the system.

However, my confidence started to falter when I got to this sentence: "The real trick here is to find a rewards credit card that pays a bonus in categories in which you spend the most money each month." This, I had to admit, was a weak point of both my rewards cards. Because the categories that pay bonus points keep changing, we don't consistently earn the best rewards on our biggest-ticket categories. Some quarters, to be sure, one of the cards will pay a bonus on gas or groceries (two categories in which we're guaranteed to spend at least some money every month). At other times, one will pay a bonus in areas where we spend money at least fairly often, such as restaurants or home improvement stores. But there are also times when the bonus categories are all but useless to us. Right now, for instance, my Citi card is paying bonus rewards on hotels, car rentals, movies, and theme parks—four categories in which we haven't spent a single penny in years.

I did some rough calculations and found that over the past three months, we've earned 1.2 and 1.4 percent respectively with our Citi and Chase cards. That was a bit of a disappointment, because I knew for a fact that we could do better than that. I've recently seen several ads on Hulu featuring Samuel L. Jackson touting the Capital One Quicksilver Cash Rewards card, which pays 1.5 percent cash back on everything—no limitations, no exceptions. However, the Money Talks News article mentioned another card that might be still better for us: the Blue Cash Everyday Card from American Express, which pays 3 percent at supermarkets, 2 percent at gas stations, and 1 percent on everything else. Both of these cards are free of annual fees, which is a bottom-line requirement for me, and their interest rates are comparable to those on our current cards—though that doesn't really matter, since we never carry a balance anyway.

It looked like either of these two cards would be better than the two we have now. To really maximize our benefits, of course, the best thing to do would be to get both of them, and then use the Blue Cash Everyday card exclusively for supermarkets and gas stations (which would be easy to remember without the need for a crib sheet) and the Capital One Quicksilver card for everything else. However, I was reluctant to apply for both cards at once, since having too many inquiries on your credit report is likely to ding your credit score, which could reduce our chances of actually getting either card. (Also, both cards offer a bonus of $100 if you spend a certain amount in the first three months, which is easier to do if you can concentrate your spending on one card at a time.) So which of the two would be more useful to get into my wallet first?

To find the answer, I figured, I'd need to go back and look at our credit card statements for the past 12 months. For each card, I could add up the amounts that we spent each month on groceries, gas, and other stuff and get a total for each category for the year. Then I'd multiply each category by its appropriate percentage—3, 2, and 1 respectively for the Blue card, 1.5 across the board for the Quicksilver card—and see which gave me a higher total. I assumed the easiest way to do this would be to set up a little spreadsheet on Excel. However, as I was perusing the details of the two credit card offers at Credit Karma, I noticed that the site was providing an "estimated savings" figure for each card, with a note saying that I could get a more accurate estimate by logging into my account. Credit Karma, for those not familiar with the site, is a website that will, with your permission, pull up your credit report and show you your credit score for free (though, as this article points out, the score they show you isn't identical to the FICO score used by most lenders). The way they can afford to do this for free is that once they know your financial situation, they can start trying to sell you financial products you might have a need for, like insurance or bank accounts. Of course, you can just ignore these offers, and most of the time, I do. However, in this case, they were offering me information about a product I actually did have a use for: a better rewards card. Why not let them do the math and tell me which card would be the best deal for me?

So I logged into my account, and bam, up popped a total of my monthly credit card spending, neatly sorted into categories. Based on these numbers, I could search their database of credit card offers to see which one had the best payoff for me. I had to do a little fiddling with the search feature to find the most useful offers, weeding out the cards with travel rewards (which are about as useful for me as a set of matched luggage for a tortoise) and the ones that charge an annual fee. Once I'd narrowed down the list, I could sort it based on criteria such as average user rating, average percentage cash back, or total payout over one, two, or three years. The Capital One Quicksilver card turned out to be the best deal over the long term: Credit Karma estimated it would pay me $308 a year, plus a one-time bonus of $100 if I spent $500 on it in the first three months, which would add up to $1,025 over three years. The Blue Cash Everyday card came in second, at $837 over three years, and my existing Chase Freedom card was a close third at $828.

These findings should have been conclusive, but something about them gave me pause. I noticed that the listing for the Chase card showed its "average rewards rate" as only 1.2 percent, and I had already determined that over the past three months it had been closer to 1.4 percent. Looking more carefully at the spending breakdown the site was using, it appeared that it was based solely on my most recent bill for each card, rather than on an average over the entire year. So it was likely that their estimates of the rewards we'd earn with each card were skewed by what we'd happened to buy in the last month.

To double-check their figures I went ahead and punched in the numbers into Excel just as I'd originally planned. Once I did this, I discovered that the savings estimates were actually significantly lower than the ones I'd gotten from Credit Karma. The Quicksilver card was still ahead, but it would only have earned us about $175 over the past year—and that's if we'd shelved all our other cards and made all our purchases on the Quicksilver card exclusively. Even with the $100 bonus, our three-year savings would be only $624. The Blue Cash card, under the same terms, would give us $157 a year, or $571 in three years with the bonus. Our current Citi Dividends and Chase Freedom cards, by contrast, are earning us a total of $144 a year. So switching the bulk of our purchases to a new card could put a little more money in our pockets each year, but not that much: only $13 for Blue or $31 for Quicksilver. It's still probably worth applying for the Quicksilver card, but it's certainly not going to be a game-changer.

It's a little disappointing that we won't be able to get that big a reward from a new rewards card, but I guess it's not that surprising. After all, the rewards you earn are based on what you spend, so the only way to rack up really huge bonuses is to spend a whole lot of money—which doesn't leave you ahead in the long run. It's the same sort of problem I've noted before with articles about saving money or cutting your energy use: you can't eliminate very much waste if your life wasn't that wasteful to start with. So I guess I should find it comforting that we can't earn really massive rewards with a credit card; it just goes to show that our credit card bills themselves are nice and lean.

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