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Credit Card Hacks

Ben Hughes
April 14, 2012
630

Credit Card Hacks

A presentation at BarCampRochester Spring 2012 on credit card points and optimization.

Ben Hughes

April 14, 2012
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Transcript

  1. Credit Card
    Hacks
    Ben Hughes
    @rubiety
    http://benhugh.es
    Wednesday, October 3, 12

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  2. Aren’t credit cards bad?
    Don’t confound financial responsibility
    with power of tools!
    It’s simple:
    Never pay credit card interest by never
    maintaining a balance.
    Wednesday, October 3, 12

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  3. Why use credit cards?
    • Builds credit with the rating agencies.
    • Improves cash flow management.
    • Initial point bonuses worth $500 - $1,000.
    • Effective 1-2% discount on everything.
    • Spending plateau point bonuses worth $100+.
    • Transaction logging & categorization (Mint.com)
    • Other Benefits (Insurance on purchased services,
    Fraud/purchase protection, etc.)
    Wednesday, October 3, 12

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  4. Building Credit
    • Essential for young adults.
    • Establishes payment history across many
    years.
    • Holding spending constant:
    An increase in available credit lowers your
    “Utilization Ratio”, an important element in
    your credit rating.
    Wednesday, October 3, 12

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  5. Cash Flow Management
    • Maintain lower cash balances: reduces
    unexpected expense risk to cash accounts.
    • Continual float (free 45-day loan, every
    month) keeps liquid assets higher than
    they’d otherwise be.
    • Holding cash has opportunity costs: higher-
    returning investments.
    Wednesday, October 3, 12

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  6. Types of Cards
    • Bank Cards
    • Generic points
    • Often convertible to cash (cash back)
    • Slightly lower redemption values (price of flexibility)
    • Airline/Hotel
    • Specific points/miles redeemable often with a single
    company.
    • Slightly higher redemption values.
    Wednesday, October 3, 12

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  7. Wednesday, October 3, 12

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  8. Initial Point Bonuses
    • Pretty much free money, just for signing up
    for a card (sometimes with spending
    requirements).
    • Credit card companies willing to take a
    short-term lost in hopes of long-term gain
    (yearly fee, interest charges).
    • Sometimes targeted offers are sent offering
    even higher initial point bonuses (Chase
    Sapphire with 75,000 reported).
    Wednesday, October 3, 12

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  9. 1-2% discount on everything
    • X Points per dollar spent, sometimes varying by
    spending category.
    • Economic incidence: cash/check payers subsidize
    card payers. Paying cash has an opportunity cost.
    • Points/Miles not considered income by IRS, so they
    are essentially tax free!
    Wednesday, October 3, 12

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  10. Point Valuation
    • Cash back is easy to value: parity
    • Hotel/Airline points:
    • Look up price of alternatives you would
    normally have chosen and calculate
    effective cash value to you
    • Valuation varies from person to person
    • Sometime exhibit diminishing marginal
    utility (who would use 100 nights at a
    Marriott?)
    Wednesday, October 3, 12

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  11. United Point Valuation
    SAN => HKG 32,500 Miles : $655 Ratio: 0.0201
    SAN => BKK 32,500 Miles : $720 Ratio: 0.0222
    SAN => JKT 32,500 Miles : $750 Ratio: 0.0231
    Avg: 0.0218
    SAN => LHR 30,000 Miles : $588 Ratio: 0.0197
    SAN => AMS 30,000 Miles : $820 Ratio: 0.0273
    SAN => IST 30,000 Miles : $750 Ratio: 0.0250
    Avg: 0.0240
    SAN => DXB 40,000 Miles : $976 Ratio: 0.0244
    SAN => BOM 40,000 Miles : $950 Ratio: 0.0238
    SAN => CAI 40,000 Miles : $846 Ratio: 0.0212
    Avg: 0.0231
    International Avg: 0.0230, or 2.3 cents per dollar spent (2.3%)
    $25,000 purchases on Continental or United Card => +10,000 point
    bonus, each $ effectively multiplies this by 1.4. If this hits:
    Wednesday, October 3, 12

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  12. Wednesday, October 3, 12

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  13. Optimizing Variable Return
    • Sometimes variable return depends on
    conditions.
    • Chase Freedom: 5% return on up to $1500
    on categories that vary. Use Chase
    Freedom for those categories.
    • Airline/Hotel cards give greater return on
    purchases with their company.
    • Keep in mind diminishing marginal utility of
    points/miles.
    Wednesday, October 3, 12

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  14. Optimizing Fixed Return
    • Use cards with fixed-transaction return
    (say, 10 points per transaction) on cheap
    transactions - higher effective return.
    Wednesday, October 3, 12

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  15. Optimizing Spending
    Plateau Bonuses
    • Fixed benefits at some level of spending in a
    year (usually $25k or $30k).
    • Plan card acquisition before major
    purchases.
    Wednesday, October 3, 12

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  16. Paying Taxes on a Credit Cards
    • IRS charges 1.89%. Point valuation can be
    higher than that.
    • Great way to contribute to spending
    plateaus - optimize accordingly!
    • Be careful with utilization ratio - could hurt
    your credit if this dips too low.
    • California charges 2.3% - more difficult but
    still could be worthwhile.
    Wednesday, October 3, 12

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  17. Maximizing Cash Float
    • Spread bill dates equidistant throughout
    the month.
    • Absent other conflicting optimizations, use
    the card with a billing date furthest away.
    Wednesday, October 3, 12

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  18. Applying for Cards
    • Cards with best rewards require high credit (> 720)
    • If cards have spending requirements, plan acquisition before
    spending.
    • Applying will ding your credit slightly (“hard” credit inquiry).
    • If getting more than one card, apply at the same time
    (grouped hard credit inquiries less damaging).
    • Carefully manage acquisitions from same bank (Chase is
    conservative).
    Wednesday, October 3, 12

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  19. My Top Card Picks
    • Chase Sapphire Preferred (50,000 United Miles)
    • Starwood American Express (30,000 SPG Points)
    • United MileagePlus Explorer (40,000 United Miles)
    • Capital One Venture (2% back on everything!)
    • Chase Freedom (5% categories, 10 points/
    transaction)
    Wednesday, October 3, 12

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  20. Wednesday, October 3, 12

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  21. Questions?
    Ben Hughes
    @rubiety
    http://benhugh.es
    • http://milecards.com/
    • http://nerdwallet.com/
    • http://thepointsguy.com/
    Wednesday, October 3, 12

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