# On the economics of travel credits and annual fees

I read a couple articles today that caught my interest, since they were about the actual value of travel credits on high annual fee cards. I generally follow the conventional wisdom that subtracts the amount of the travel credit from the annual fee to obtain a “net” annual fee. On the Sapphire Reserve, for example, the math would be: \$450 annual fee minus \$300 travel credit = \$150 net fee.

Not everyone agrees with this, including the these two articles which I highly recommend. I disagree with them, ultimately, but this is still something that people should be aware of, because it’s really easy to find yourself paying \$2000+ in annual fees while saying “well it’s really only \$750 after travel credits”… meanwhile, there’s still \$2000+ dollars missing from your checking account when you go to pay your bills.

I see both sides of this, because I do value the Chase Sapphire Reserve travel credit like cash, whereas I canceled my City National card because I didn’t want to cough up \$400 — even though I could have earned \$500 in travel credits over the course of the year. Here’s they key difference that everyone needs to figure out for themselves: would you have spent the money anyway?

As the Joe Flies makes the argument that travel credits force you to pay cash for your traveling, whereas you should spend points, since presumably you’re paying that high annual fee at least in part to earn those points. However, I see it a little differently, since I always have a few hundred bucks of ticky-tack airline spend each year that would not be a good use of points. My whole goal is to use my points on aspirational redemptions, and flying to Salt Lake City for work or to Vegas for the weekend is not very aspirational. In other words, I want to use points for things I can’t afford – not for things I can. Having the travel credit in my back pocket frees up my points for aspirational redemptions.

That said, it’s not exactly free money. Running with Miles presents a more realistic take on the annual fee math above: \$450 annual fee PLUS \$300 in travel spending minus \$300 travel credit = \$450 that isn’t in your bank account anymore. You don’t just get the \$300 handed to you – you have to spend money to earn it, so you aren’t exactly coming out ahead. Or are you?

If you’re absolutely positive that you would have spent \$300 on travel over the course of the the year, then the math needs to take that into account. So, if you’re going to argue that the net fee is \$450, you need to look at how your finances would look if you didn’t get the card: \$300 in travel spending minus no travel credit = \$300 that isn’t in your bank account anymore. If you add those two equations together, that’s how you get to the claim that the net fee on the Sapphire Reserve is \$150. Yes, you’re prepaying your travel expenses, but if those expenses would have been incurred anyway, as long as you aren’t putting too much of a strain on your cash flow, there’s not really much of a downside. However, if you weren’t going to spend that money anyway, then the math starts to fall apart, and you end up spending money on things you wouldn’t otherwise have needed because they’re “free” (in quotation marks because they aren’t free at all – you paid \$450 for them).

Running with Miles uses an analogy of paying for your friend’s meal and then having the friend pay for a future meal of yours; the takeaway is that the second meal isn’t free, since you only earned it as a result of buying his meal the first time around. And while that may be true, it sidesteps the reason why people pay any money for annual fees at all – that there are benefits associated with having the card. That second meal wasn’t a freebie since you paid up front for it, but if your friend said that he’d let you sit shotgun every time you rode in his car with your 6-deep crew in exchange for paying for his meal, then you’re coming out ahead because you weren’t ultimately out any money AND you got a benefit out of it.

Of course, that’s why it’s important to put a realistic value on benefits as well as travel credits. I never play golf and rarely fly American Airlines, so getting lounge access and golf benefits from the Citi Prestige card didn’t matter to me (and I didn’t care when Citi nerfed them). People who aren’t frequent travelers don’t really benefit much from Priority Pass memberships, so the Sapphire Reserve may not even be worth \$150 for them. Following that line of thinking, anyone who wouldn’t spend \$300 on travel in a normal year very likely doesn’t travel enough for the card to make sense for them either. The card is geared toward people who travel often, and it’s those people who incur \$300 (if not \$30,000) in everyday travel expenses; likewise, those are the people who benefit most from lounge access, 3x points on dining and travel, and maybe even a concierge. If you’re worried about organically spending \$300 per year on travel, it isn’t the card for you, regardless of the economics of the travel credit.

Let’s look at the new Amex Platinum card, which just raised the fee to \$550 but added a new \$200 per year Uber credit. I use Uber a lot, so I think I will get all \$200 of that as a cash-equivalent fee mitigation (since I currently spend over \$200 on Uber in a year). Additionally, I will get \$200 in United Gift Registry credit that I will probably use on flights to Las Vegas for my wife’s birthday, since that has become an annual trip that we’ll take regardless of which credit cards we hold. Over with Chase, given the range of things that qualify for the \$300 fee credit, I’ll probably use up the entire credit within a month or two just on everyday spending (and it doesn’t hurt that I have a work trip every January). Therefore, I don’t consider it a stretch to look at the net fee across these two cards as \$300 – provided I don’t forget to pay myself back for the annual fees I paid up front. (However, there’s also a limit to how much United gift registry credit I can use in a year, which is why the additional \$500 I could have wrung from my City National card wasn’t enough to offset the \$400 fee I didn’t want to pay.)

That brings up another point touched on by both of the articles I linked, which is the mental energy to manage all this shit. The net monetary fee may be some dollar amount, but there’s the cost of my time as well, and I have to decide whether that time is worth the benefits I get from the cards (in both cases I do, but you may not). For instance, in January when my Sapphire Reserve fee credits start rolling in, it’s really easy for me to look at my budget spreadsheet and think “Wow, I have \$300 of extra money this month,” when in reality I need to remember to save it for when the fee comes due nine months later. Ditto the Amex Platinum stuff – the credits on Uber are great, but I responded to that benefit by setting up automatic monthly \$15 transfers to my savings account that I will use to pay the fee when it comes due in the fall.

At the end of the day, I do think it’s legitimate to compute the net fee on these cards as I did at the very top of this post (that is to say, by subtracting the credit amount from the total fee). However, there is a lot that goes into that determination, which is why I think articles articulating why those credits may not be cash equivalents are important to consider.

i like to think that is mental energy and time are actually mental energy and time spent on a hobby — one i sometimes love, and often get frustrated by. maybe it’s a weird hobby, but it’s mine.

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2. davewwjd says:

Very good points on the equations there. I’m probably more in the side of not justifying the fee, though I love both the plat and the CSR benefits. Question is can I actually make use of the benefits. Thanks for a thoughtful opinion and some plain facts!

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I don’t *personally* understand aspirational travel – I understand it to some extent, in that you’re getting a bigger “discount” using miles over cash for more expensive things, but the question then becomes, is the discount enough of a discount? If a flight in economy was \$1000, and I could get a \$4000 business class flight for \$2000 worth of points, or the flight in economy for the same \$1000 in points as cash, I’d still probably spend the points on the economy flight, because it’s not worth double to me to fly business class any more than it’s worth 4 times, so the fact that it’s discounted doesn’t matter.

I totally still spend at least \$300 a year on travel in cash a year, though, because I sometimes like doing things where the choice isn’t “do I want to spend points or cash on the same thing”, but “do I want to spend cash, or get a less good experience because the place I really want to stay isn’t in the UR portal?”, and the answer is often “I want to spend cash”. I love the UR portal because it has a lot of small non-chains and b&bs, but it doesn’t have everything, plus, sometimes the best b&b is of the “air” variety. 😉 So I just think of the \$300 credit as “floating Chase a \$300 no-interest loan for a few months”, which, eh, I’m ok with that.

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4. sirtheta1729 says:

Both of these posts make some questionable assertions (*especially* the Running with Miles one, as you point out), and may even inspire a blog post of my own.

Now, that’s not to say the Saverocity article doesn’t have an excellent point about essentially pre-paying for travel on the Chase Sapphire Reserve (because that is an excellent point!). And sure, many people have missed the point that the Chase Sapphire Reserve’s \$300 travel credit reducing the annual fee is implicitly followed in a big bold typeface by “only for travel on which you would’ve spent cash”. (an explicit version of which I have used any number of times in talking about the effective annual fee.)

But ultimately the Chase Sapphire Reserve is precisely the set of “the poorest possible example that can be used to illustrate the point” because the travel credit applies to any travel and is straight cash. If you don’t spend \$300 cash on travel purchases, it’s not for you. But for many people, the \$300 travel credit is precisely what it looks like: a \$300 discount on the annual fee.

That’s the illustrative example I would’ve used, anyway.

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The other point I would make is that paying cash is not necessarily a bad thing. Like, there’s a good point to be made that trying to maximize the value of your points redemptions is a trap, and you should preferentially use points to offset real travel costs. (A point often made by Freequent Flyer, but missing in these posts.)

But the set of people who have enough points to consistently do this is much smaller than the reading audience of the two linked blogs. “Most” people do need to pay cash at some juncture because “most” people have a finite points balance (even disregarding aspirational redemptions and the like). In such cases, it really is important to maximize the value you’re getting from your points, and to maximize the reduction in cost of cash bookings. Reducing the cash cost of bookings thus becomes an important part of the benefits of a card, and it makes great sense to include the travel/airline/whatever credits in your valuation of a card’s benefits.

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1. sirtheta1729 says:

(Lest I be read wrong, I do think the As the Joe Flies post is making a great “makes u think” point about valuing travel credits, as many people do fail to very critically consider the benefits and that leads them to overvalue the credits. I just think Joe’s analysis presents a very incomplete picture.)

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