How to think about the value of credit card rewards and benefits.

I get asked all the time by friends and colleagues if they should sign up for a new credit card for [insert reason here]. Ultimately whether I recommend signing up for a new credit card comes down to one question:

Will you receive quantifiable value out of the credit card that is well in excess of its annual fee?

This is how I think about credit cards, and how you should too.

Think of rewards in terms of cash they would otherwise displace

Cash back – Cash back is easy to value. If a credit card gives you $100 in cash back, it is worth $100.

Purchase Offset Credits – Some credit cards offer opportunities to redeem points to offset certain types of purchases like travel, restaurants, or transporation. The Capital One Venture X card, for example, offers points that are worth 1 cent each if they are redeemed against travel purchases you put in the card. Generally, I only place a value on purchase offsets if I am *certain* that I will spend enough on a card in categories that I can offset with my points.

Frequent Flyer Miles and Hotel Points – One mistake people make is that they value points based on the flashy first class and luxury hotel redemptions promoted by some bloggers. Yes, you might be able to get into the Park Hyatt Kyoto for 30,000 points a night, but that doesn’t mean that your points are worth 5.08 cents each because you probably wouldn’t otherwise pay $1,524.47 per night to stay in that hotel. Personally, I use Frequent Miler’s Reasonable Redemption Values, but I acknowledge that if I’m sitting on half a million SkyMiles, the marginal SkyMile is worth substantially less than that amount.

Your benefits are worth what you would pay

Benefits You Frequently Use – For me, this means things like lounge access and extended warranty benefits.

Airport lounge access is a benefit that I use almost every time I am traveling. On my American Express Platinum card, I receive access to Delta Sky Clubs when traveling on a same-day Delta itinerary, I can access American Express lounges 3 hours prior to a flight, and I have access to the Priority Pass network of lounges. This means that I have 4 lounges at my home airport, MSP, and I almost always stop into them before my flight and frequently upon my return. When traveling, I’d normally spend $15 for a meal at an airport while passing through. If I take 20 flights (or 10 round trips) per year, that is $300 of food that I am otherwise not buying, because I can eat in the lounge. I probably wouldn’t pay $300 up-front for this benefit, but I’d definitely pay $200, so that’s what I value lounge access at.

Extended warranty is another benefit that I use with some frequency. I don’t think that consumer electronics are explicitly designed to fail after their manufacturer’s warranty expires, but I’ve experienced my share of Nexus Phone Boot Loops, iPad crashes, printer malfunctions and other issues to know that getting an extra year of warranty from my American Express Card is worth it. Let’s say I buy $1000 of purchases with warranties and 10% of them break within the first year after a manufacturer’s warrant expires. That’s $100 of value. Would I pay $50 per year for that? Likely.

Benefits You Rarely Use – In addition to the benefits you regularly use, there are some benefits like trip delay protection, primary rental car insurance, purchase protection, or cell phone insurance that I rarely use. Yes, if the new iPad I bought gets stolen in the next 90 days, purchase protection will be incredibly valuable… but that’s unlikely to happen. Yes, you should always buy things on cards that protect you from theft. Yes, you should rent your car using a card with primary rental car insurance if you have it. But it’s probably not worth placing a value on these.

Duplicate Benefits – If you are a card-collector, you might have multiple cards that have overlapping benefits. This shows up commonly in people who carry multiple premium credit cards that have overlapping lounge benefits. Your first PriorityPass lounge membership is worth something, but your second, third, or forth don’t get you anything extra, so don’t value them.

Summary

Collecting credit card, airline, and hotel points has allowed me to have some pretty amazing experiences, but I always try to be level-headed about evaluating the value I am getting from having my credit cards. I’m happy to pay a $695 annual fee on my American Express Card, but only if I am getting value well in excess of the annual fee. Hopefully the above framework helps you as you evaluate how you use credit cards and miles and points.

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