Deciding between low fees and bonus categories

Several months ago, around the time I moved West and decided to try my hand at blogging and travel hacking for a living, I made a sort of philosophical decision that I would only manufacture spend in bonus categories, except for the few very, very cheap options still available, where I would continue to manufacture non-bonused (but hopefully valuable!) spend.

For example, while US Bank and Nationwide Visa Buxx loads cost $2.50 and $2.00, respectively, for loads up to $500, I'm willing to earn a mere 2% or 2.22% cash back on that spend, but for gas station, drug store, and grocery store spend I decided to direct that spend exclusively towards cards that featured above-average earning rates.

That's a perfectly reasonable decision but, being me, I've long wanted to expose it to a bit more thorough analysis and make sure it's rational as well. This is that analysis.

Bonus categories

There are quite a few bonus categories which typically generate the most interest among travel hackers, including gas stations, drug stores, grocery stores, and office supply stores. Each of these might feature a variety of price points: $3.95, $4.95, or $5.95, and a variety of associated discounts, like the Visa Savings Edge 1% discount at Staples.

Non-bonused spend

In addition to bonus categories, there are a number of manufactured spend techniques that don't generate bonus category rewards, but cost somewhat less than spend in those bonus categories. For example, I've been flogging AAA Visa gift cards and the assortment of Visa Buxx cards for as long as I can remember. The fees for what we might call "generic" techniques tend to fall between $2 and $3 per $500 in manufactured spend.

Points-only earning

For spend on cards which generate only points, this analysis is relatively easy (although not as easy as it looks – more on that below). If your bonus category earns a higher multiple than the ratio of bonused category costs to non-bonused costs, you'd naturally be better off manufacturing the spend in a bonus category.

To provide a trivial example of this, the US Bank Flexperks Travel Rewards Visa card earns 2 Flexpoints per dollar spent at gas stations (or grocery stores – wherever you spend the most each statement cycle), and 1 Flexpoint per dollar spent everywhere else. If you're manufacturing spend exclusively for the value of the Flexpoints (redeemable for up to 2 cents per point on mileage-earning airline tickets), you're (almost) always better off earning 1,008 or 1,010 Flexpoints for $3.95 or $4.95 (plus liquidation costs) rather than earning 503 points for $3 (ditto), since you're paying just 33-66% more for 100% more Flexpoints per dollar.

High-spend bonuses

Next, there are cards where you're interested in manufacturing a certain amount of calendar or membership year spend, but which don't feature bonus categories or which have points that aren't worth manufacturing for their own sake.

This category is defined by products like the American Express Delta Platinum and Reserve cards, which offer bonus Medallion Qualifying Miles and redeemable Skymiles at the $25,000/$50,000 and $30,000/$60,000 spend levels, respectively, in addition to the Medallion Qualifying Dollars waiver offered to all American Express Delta co-branded credit card holders who spend $25,000 or more per calendar year across all their Delta co-branded credit cards.

Since these cards don't have any bonus categories, if you just want to meet those high-spend thresholds there's no reason not to meet them as cheaply as possible.

As another example, I've recently written about using Chase Marriott Rewards Premier cards to achieve Marriott Rewards Gold elite status. Since Marriott Rewards points are worth less than one cent each under most circumstances, you'd be crazy to cannibalize any of your valuable bonus category spend meeting that spending requirement, but might consider moving some of your cheaper spend towards the Premier card, as I in fact have.

As I've documented extensively, $3,000 spent on the Marriott Rewards Premier credit card would cost not just the $18 spent on PIN-enabled Visa gift cards, but also the $60 or $66 in foregone cash back you'd earn by putting the same spend on a 2% or 2.22% cash back card. It's fairly insane to buy 3,000 Marriott Rewards points for $60, but it becomes more understandable if you intend to use the elite-qualifying night to achieve Marriott Gold elite status – after all, even $66 is a pretty cheap mattress run for elite status.

Mixed-purpose cards

And now we've come to the crux of the issue: how do we treat cards that have both bonus categories and spend thresholds?

Here another example comes in handy: how much does it cost to achieve Hilton HHonors Diamond elite status using the American Express Hilton HHonors Surpass card?

Well, the card awards Diamond elite status after $40,000 in calendar year spend, so:

  • At $3 per $503, Diamond elite status costs $238;
  • At $4 per $504, Diamond elite status costs $317;
  • At $5 per $505, Diamond elite status costs $396;
  • At $6 per $506, Diamond elite status costs $474.

This straightforward accounting fails, however, because the first entry is in a non-bonused category, earning just 3 HHonors points per dollar, or 120,000 points total, while the other three entries earn 6 HHonors points per dollar (gas, gas, and grocery, respectively), or 240,000 points over the course of $40,000 in manufactured spend.

At each of our bonused price points, the marginal 120,000 HHonors points each cost:

  • $4: 0.07 cents;
  • $5: 0.13 cents;
  • $6: 0.2 cents.

Hilton HHonors points get a bad rap from a lot of folks in the community, but it's ludicrously easy to get 2-5 times more value than that from even the most typical Hilton redemption.

Liquidity has value

Finally, there's one point that's not exactly fashionable to mention: liquidity. Liquidity, in the sense I mean it, is the ability to turn available credit limits into cash, that can be used (preferably through a mileage-earning debit card) to pay off existing credit card balances, while also earning credit card rewards on the initial transaction. That has value. And, most importantly, it has value independent of the value of the miles generated by the initial transaction.

Consider a travel hacker with just two credit cards and $10,000 in credit card debt: the Hilton HHonors Surpass American Express card ($0 balance, $11,000 credit limit) and the US Bank Flexperks Travel Rewards Visa ($10,000 balance, $10,000 credit limit).

A straightforward analysis of the type I gave above would suggest that the user would be better off manufacturing $10,000 on the HHonors Surpass card exclusively in bonus categories, earning 60,000 HHonors points. The problem is that for many users in many parts of the country, manufacturing that much spend in bonus categories is hard. Grocery stores and gas stations often have restrictive policies preventing large purchases, while non-bonused-category merchants can be more accommodating.

In this case, using the HHonors Surpass card at a non-bonused merchant can, while generating fewer miles per dollar, produce the liquidity necessary to pay off the Flexperks Travel Rewards card in time to avoid interest charges and liberate the card's credit limit for spend in that card's own bonus categories.

Most travel hackers will tell you you're crazy to play the game while carrying credit card balances, which eat up any rewards you could possibly earn from your activities. I'll tell you that's only true if you're paying interest on your credit card balances. Liquidity is what makes it possible to not just carry credit card balance, but profit from them, and it's worth considering in any analysis.