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Selecting From the Credit Card Cornucopia

When was the last time you thought about your credit card? If you’re like many Americans, it’s probably been a while.

The New York Times recently reported a survey from CreditCards.com pointing out that over a quarter of people age 30 to 49 years old haven’t changed their credit card in a least six years. And a third of people over 65 have had the same card for a least a decade. But consumers’ credit card inertia may be starting to change, and the days of staying loyal to a single card tied to a single airline or retailer may be coming to an end. Credit card companies are competing fiercely to attach themselves to consumers and are offering a broad array of card options with more flexible benefits.

How to Choose

What’s the best way to choose the card that’s right for you? In part, that depends on your unique spending patterns, desire for simplicity versus benefit optimization, and willingness to pay an annual fee to obtain better rewards. For many, the credit card interest is an important factor; but our clients generally pay off their credit card balance each month, making the interest rate far less important.

What’s more important are factors like: What’s the annual fee? Is there a generous sign-up bonus? Can you earn cash back, points, airline miles and other perks? In general, you should select a card that is compatible with your lifestyle and spending patterns and that provides broad ability to earn rewards and other perks that you personally value. If you pay an annual fee, you should believe the benefits exceed the cost.

The days of staying loyal to a single card tied to a single airline or retailer may be coming to an end.

Credit card benefits tend to fall into certain categories, such as cash back, low interest rates, and travel benefits like airline miles and hotel stays. Earning benefits besides cash back on purchases usually means paying an annual fee. Clients averse to paying any annual fees are probably best served seeking out cards with attractive cash-back features where the issuer pays you 1.5% to 2.0% back on your annual purchases. That may be a good solution for clients who value simplicity, but a number of cards pay a higher percentage rebate based on the category of spending. If you’re looking to boost your cash-back rebate, find a card that pays more in the areas where you spend the most.

Maximizers might select a few cards and use them strategically to cover spending in distinct categories. For example, one card may offer rebates of 5% to 6% for spending on home improvement and supermarkets. Combining that card with a cash-back card that covers a broader number of spending categories for your other purchases can result in a larger total cash-back bonus at the end of the year. And some no-fee cards also offer sign-up bonuses worth hundreds of dollars. In absolute dollar terms, the cash rebates won’t have a big impact on your financial condition. But at the same time, why leave money, potentially hundreds of dollars, on the table?

Big Fee, Big Rewards?

Lately, the real action is occurring with so-called prestige travel cards like the Chase Sapphire Reserve, American Express Platinum and Citi Prestige cards. All of these cards charge a whopping $450 annual fee, but each of them comes with a different array of benefits and perks that could make them a sensible choice, particularly for many of the clients we serve. Generally, these cards make the most sense for consumers who travel a lot and dine out a lot. The table below sets out a few of the key features of these high annual fee cards:

  American Express Platinum Chase Sapphire Reserve Citi Prestige
Annual Fee $450 $450 $450
Annual Travel Credit $200 on flights $300 $250 on flights
Points Bonus 5x on flights 3x on travel and dining 3x on travel
2x on dining
Sign-Up Bonus 40,000 points
(after $3,000 on
purchases in the first three months)
50,000 points
(after $4,000 on
purchases in the first three months)
40,000 points
(after $4,000 on
purchases in the first three months)

Source: Credit card websites as of Jan. 18, 2017.

The Chase Sapphire Reserve card, launched in August, has made a big splash with a very attractive sign-up bonus and other perks. It provides a good example of how these cards can work. First, if you travel, you should easily earn the $300 credit for travel expenses paid with the card, theoretically reducing the annual fee to $150. And the 50,000 point sign-up bonus is worth $750 in travel costs when redeemed through the Chase Ultimate Rewards® travel portal. Other observers have assigned a higher value when factoring in the ability to transfer the points to other program participants. So, the sign-up bonus alone is worth five years of annual fees if you think of that fee as $150 per year.

Alternatively, an analyst at popular credit card website NerdWallet notes the travel spending rate required to cover the remaining $150 annual fee: “You’ll earn 3 points per dollar on travel and dining, and you can redeem points for 1.5 cents apiece through Chase Ultimate Rewards®. That means you need to spend about $3,333 on travel and dining per year to wipe out the rest of that annual fee.” After factoring in the sign-up bonus, clients who travel and dine out a lot should come out ahead with a card like this.

To be clear, we’re not recommending the Chase card, or any other card, as the best option. Our objective is simply to illustrate how the benefits of a large sign-up bonus and other features can more than offset a high annual fee if your personal spending pattern connects well with a particular card’s benefits. And there are lots of other credit cards with lower annual fees and other specialized benefits, so the odds are there is a card out there that is a good match for your personal circumstances. Remember, however, that applying for a new card could affect your credit rating.

We advise clients to review many aspects of their wealth planning periodically, such as estate planning. In our increasingly digital-spending world, it may be time to add credit cards to that list.

NOTE: This post was updated Jan. 20, 2017.