In the last year there’s been a minor trend towards requiring a “tiered” spend to completely unlock a credit card’s signup bonus. The British Airways 100,000 Avios offer is a prime example. When applying for the British Airways card under that irregularly occurring promotion (which apparently is timed to coincide with the appearance of a blue moon or Elvis or something or other), the first $2,000 in spend is rewarded with 50,000 Avios, which matches the standard offer on the card. But to get the additional 50,000 Avios, one is required to spend another $18,000 over the course of a year. The current Citi ThankYou Premier 50,000 point offer is another example – more than half the bonus on that card doesn’t even arrive until the second year of cardmembership, and only after a further spend requirement and payment of the $125 annual fee for the second year.
The bonuses offered on many cards for “high spending” operate in much the same way. Though they’re framed differently than a tiered bonus and can be repeated each year, in effect it’s the same tactic, especially in the first year of a newly acquired credit card when the annual fee has been waived.
Much of the conventional wisdom suggests that these bonuses are worth pursuing, either by actually spending large amounts (for those who routinely have high levels of credit card spend) or via manufactured spending. But the Devil’s Advocate asks how much are we gaining by committing so much spend towards one bonus, and are we able to do better elsewhere?
Valuing tiered and high spend bonuses
Let’s take a look at the math behind that British Airways offer. For the first $2,000 in spend, we’re getting 50,000 Avios. We also get a 1.25x multiplier on all standard spend with this card, so if we spend exactly $2,000 to earn that first 50,000 bonus, we’re effectively getting a 26x multiplier on our $2,000 spend. That’s fantastic and a textbook example of why credit card signups are the best way to quickly accumulate a ton of no cost miles.
Unfortunately, to unlock the next 25,000 Avios we’ll have to spend another $8,000, which makes the multiplier on that portion of our spend plummet to 4.375x. That’s a monumental drop. And when we move onto the final 25,000 Avios, we’re required to spend another $10,000, which further reduces the multiplier for that portion of spend to only 3.75x. Put it all together and we’ve managed to cut that fantastic original 26x multiplier to an average of just 6.25x. That’s only marginally better than just using a card with 5x bonus categories, and we had to spend $20,000 to achieve it.
Checking the math on “high spending” bonuses gives us much the same result. Putting aside the more subjective benefits for high spend such as Medallion miles or Companion Passes and focusing just on spend multipliers, we find the effective multipliers for high spend aren’t even as good as the tiered bonuses. Using the popular American Express Premier Rewards Gold as an example, $30,000 in annual spend results in a bonus of 15,000 Membership Rewards points for a total of 45,000 points (including the base points). That’s a multiplier of only 1.5x. We can do better with a standard 2% cash back card and we’ll get that 2% cash back from the very first dollar without having to worry about meeting any particular spend threshold.
The Devil’s Advocate says skip the tiered spend… even if you lose part of the bonus.
Banks market their credit card offers by emphasizing only the final number. “Earn 100,000 bonus Avios in your first year with your new British Airways Visa!” Of course, they want you to get excited by the idea of that big pile of miles. But there’s nothing wrong with only completing the portion of the spend that makes mathematical sense. If you’re lucky enough to have the resources to put a high amount of spend on credit cards, or you’re clever enough to effectively manufacture large amounts of spend at low cost, remember that you still only have a finite amount of spend – even if you’re manufacturing it, there’s only so many hours in the day. So don’t plow it all into one card if you can do better elsewhere. Instead, choose your targets strategically by aiming for category bonuses and cards with high base earnings. Or regularly open new cards with non-tiered spending requirements and commit your spend to those bonus offers.
It’s your spend – use it wisely!
Last Week’s Post – Closing Credit Lines
It was a quiet week for comments on last week’s post about closing unused credit cards (see “Close That Unused Credit Line!“). But one factor we didn’t cover in regards to closing credit lines is the effect it might have on account length. By closing unused credit accounts, aren’t we reducing the average length of time for our accounts?
The answer is no… or at least not today. Closing a credit card has no effect on the average age of your accounts or the length of your credit history. Credit reporting agencies not only continue to list closed accounts on your credit report, but they will actually age accounts that were always paid on time for 10 additional years from the date of closure. Independent credit monitoring companies such as Credit Karma and Credit Sesame sometimes use scoring models that consider only the length of time that an account was actually open, but those companies are only providing FAKO scores. The only score that matters is the true FICO score, and for that model, you will get the benefit of your closed accounts for 10 more years. So the difference in age between closing an account and leaving it open won’t be felt on your credit score until 10 years after you’ve closed it, and let’s face it, losing that account a decade from now will be as relevant to you then as Deuce Bigalow: European Gigolo is to you today. Well, okay, maybe Deuce Bigalow was never particularly relevant to you, but I’m sure you get the point.
If you disagree about the idea of closing unused credit lines, you can add your thoughts to the comments on last week’s post, or join us for discussion about tiered and high spend bonuses in the comments below. Prove the Devil’s Advocate wrong!Devil’s Advocate is a weekly series that deliberately argues a contrarian view on travel and loyalty programs. Sometimes the Devil’s Advocate truly believes in the counterargument. Other times he takes the opposing position just to see if the original argument holds water. But his main objective is to engage in friendly debate with the miles and points community to determine if today’s conventional wisdom is valid. You can suggest future topics by sending an email to firstname.lastname@example.org.