Formula to Decide Whether or Not to Get a Credit Card

One of the most frequently asked questions we get is, "should I get X card?" In this post, we'll walk through our thought process to see whether or not it makes sense to get X credit card.

 

Benefit you receive from the card

To start off with, we need to calculate if the card will give you a positive return on spend.

Benefit: (amount of spend) (cash back %) – Annual fee = X

For example, if you spend $10,000 in one year and you earn 1% cash back on the card, the benefit is $100. 

1% Card Benefit: ($10,000)(1%) - $0 = $100

This may sound good at first because the net value is $100, but we need to consider the opportunity cost.

Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. 

A good example of this is the Citi Double Cash card, no annual fee, where you can earn 2% back on all purchases. 

Citi Double Cash (2%) Benefit: ($10,000)(2%) - $0=$200

If we take the same scenario, 2% of $10,000 is $200. By not having the Citi Double Cash card, the opportunity cost is -$100. 

Real Benefit from 1% Card: (amount of spend) (cash back %) — Annual fee — Opportunity cost

($10,000) (1%) — $0 annual fee — $200 opportunity cost = -$100

Other perks to consider

  • Signup bonus- the signup bonus for getting a card can throw a wrench in the formula. If it provides outsized value that you would use, then it may make sense to get the card.
  • Travel credit- factor in the travel credit as a positive impact if you were to spend the money regardless of receiving a credit. For example, the Chase Sapphire Reserve offers a $300 travel credit that can be used on transportation, Uber, and much more. If you were to take Ubers regardless of the credit, then this is an added benefit.
  • However, other credit cards offer travel credit that can be spent on travel upgrades. If you would usually not purchase an upgrade, then the travel credit should be counted as no impact. 
  • Airport lounges - I usually value airport lounges at the price of what I would otherwise spend on food at the airport. Some people value this benefit at $0 because they don't care for lounges. 

Year 1 formula:

Signup bonus + (amount of spend) (rewards rate %) — Annual fee — (amount of spend) (opportunity cost rewards rate %) + travel credit + airport lounges + other benefits = net expected value

Year 2 (and onwards) formula:

(amount of spend) (rewards rate %) — Annual fee — (amount of spend) (opportunity cost rewards rate %) + travel credit + airport lounges + other benefits = net expected value