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On Getting a New Credit Card

October 6, 2016

Let's start out with some disclosure and general advice first. Credit cards can be a useful tool to manage your spending and cash flow, but you should never use them to buy something that you cannot actually afford to pay in cash. There are financial and not-exactly-financial benefits to owning credit cards, but it's also easy to run into financial trouble if you don't keep a close eye on what you're doing. Even if you only spend what you can afford, missing payment dates or stretching out your payments can lead to fees and excessive interest cost.

In general, if you are looking for a card, focus on a low annual fee and benefits that line up with your actual spending. For the average situation, the Citi Double Cash card is probably an excellent choice. When choosing a card, compare the costs and benefits very carefully.

Ok. Here we go.

 




The latest cover of Bloomberg perfectly illustrates people's recent fascination (obsession?) with Chase Credit Cards. Chase has done an excellent job of developing reward combinations and card features to develop an aspirational and status-obsessed following. The Chase Sapphire Preferred touts dining, entertainment and travel benefits fit for a jet set lifestyle and a metal core of the card that gives it an impressive plunk when you throw it on the counter to pay for your coffee. Full disclosure, I own this card. I take advantage of the extra points while eating out, and I get a little smug satisfaction sliding the weighty card across the counter every time I use it. The financial benefits make it worth the $95 annual fee, in my calculation.

The card at hand, however, is their newest offering, the Sapphire Reserve card. This takes it to a new level of both benefits, status, and price. A quick overview:

  • Three points for every dollar spent on Travel or Dining.

  • $450 annual fee!!

  • Weight of the metal core will continue to impress at Chick-Fil-A.

  • $300 airline credit every year!!

  • $100 credit for TSA Pre Check or Global entry (every 4 years).

  • 0% foreign transaction fees

  • Supposedly very nice concierge service. (I spoke with Bob in Cincinnati today, he was nice!)

  • A 100,000 point sign on bonus.

  • And MORE!

  • But that $450 annual fee though!!!

The $450 annual fee is a BIG barrier. After all, what did I say before? What did I promise myself before? No excessive spending on an annual fee. The draw of the status is clearly strong (as indicated by the Bloomberg cover) people are posting unboxing videos to hype the card. I had to do the math.

So the annual fee is $450. Steep. Way higher than my $95 Sapphire Preferred. That is the price to overcome.

The 100,000 point bonus is worth $1,000 in cash. If you use their points in their rewards portal (easy to book plane tickets or hotels), they are worth 50% more, or $1,500. If you transfer them to your airline rewards program, I have figured they could be worth up to $3,000 (My calculation is based on getting the best deals for reward tickets, I have seen 35,000 points purchase a $1,200 ticket). I want to be very conservative with my calculations, so since this is a one time benefit, I won't have it in the future. I won't add it in my calculations.

Straight off the bat, you get $300 to spend on airline tickets each year. As $300 is about how much a ticket out of Jackson costs, and I travel at least once a year, I'll count all of this against the annual fee. While we're on the topic of travel, you get $100 to spend on TSA Pre Check or Global Entry. Global Entry is $100 for 5 years of basically skipping the gen-pop security line, so that works out to $20 per year. Since I'm being very conservative in my calculations, I am not going to include that as a pure benefit, as I probably wouldn't have gotten that anyway.

Three points for every dollar spent on Travel or Dining starts to add up. I love food. I love eating out. I keep to a budget, but that budget has made sacrifices to allow me to eat out a few times a month. I also love travel, but the main spending there that counts for this card will be airline tickets. I may spend $6,000 on dining out (including happy hour, coffee, chick-fil-a and date night) and travel each year. On its face, this will give me an extra 6,000 points more than my Sapphire Preferred card, worth $60. However, when I use points through Chase, the two Preferred points and their 25% bonus are worth 2.5 cents, but the three Reserve points and their 50% bonus will be worth 4.5 cents! So the $6,000 I expect to spend on dining and travel will be worth $120 a year with the reserve.

So, in strict (very strict) dollar terms, this card is worth $420 per year more than my current card. If I move my Preferred card to the no-fee version, this should actually save me a few dollars each year!

Confident that this move is worth it on a strict cash basis, I can drool over the other benefits. Since this basically gives me free Global Entry, I can leave my belt and shoes on when I go through security, and take shorter lines in busy airports! The card gives you access to over 900 airport lounges worldwide. I'll still impress everyone in the coffee shop with how obnoxiously I can slam down the card as I buy myself a row of espresso shots. This card has probably the best car rental and travel insurance benefits, so I don't have to shell out of my own pocket if someone happens to rear end me on Highway 101 in Ventura California resulting in $947 worth of damage billable to me when Fox Rental loses the paperwork I turned in with the offender's insurance information and photos indicating that I was not at all at fault because we wouldn't want that to happen.

Now excuse me while I keep justifying this to myself.

IMPORTANT NOTES

 

  1. Again, don't use a credit card if you can't afford the spending.

  2. If you don't want to get into the weeds of the math to see if a card fits your spending habits, keep it simple with a no fee cash back card like the Citi Double Cash.

  3. If you get an exciting new card to replace a current card, drop your old card to a no-fee version and shred it - but don't close the account! Keeping the account open may help your credit score, particularly if you are new to the credit card world (i.e. have had credit cards less than 6 years).

     

     

     

     

     

     

     

     

     

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