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A couple of weeks ago I first wrote about the Discover it Miles Card, which is a brand new no annual fee product from Discover.
The card offers unlimited 1.5x Miles for every net dollar you spend on purchases, with a few options for redemption.
- You can redeem for cash as an electronic deposit to your bank account or for a credit for travel purchases on your statement made within in last 180 days.
- Travel purchases include airline tickets, hotel rooms, car rentals, travel agents, online travel sites and commuter transportation.
What makes this card especially interesting is that you earn double miles for the first year. After the first 12 consecutive billing periods that your new account is open, Discover will double all the miles you’ve earned and apply them to your account in the next billing cycle
Your sign-up bonus is effectively getting 3% back on all purchases for the first year, which is tough to beat on everyday spend.
So under what circumstances does it make sense to sign-up for a credit card with no “instant gratification” sign-up bonus?
What’s the opportunity cost of a credit card application?
A couple of years ago I wrote a post entitled “how much of a reward do you need to apply for a credit card?”
As the name suggests, I pondered what my threshold really is for taking action and applying for a credit card. There are a few things that factor into my decision:
What’s an “inquiry” worth?
- When you apply for a credit card you get a credit inquiry, which temporarily dings your credit score.
- So what do you value your credit score temporarily falling ~2-3 points at (long term applying for cards can actually improve your score)?
What’s the opportunity cost of the application?
- This is similar to the above, though I guess more specifically what’s the direct opportunity cost of that application?
- Which card could you otherwise apply for?
How much “hassle” is involved?
- Ultimately applying for a credit card isn’t rocket science, but you have to apply, activate it, manage the payment of it, etc.
- That takes at least some time.
My personal threshold is ~$400. If I can make a net “profit” of ~$400 on a card, it’s worth it to me to apply. Of course that’s an average over time, and assumes there’s not some other better offer at the time (I don’t generally apply for many credit cards at once).
And I’ll also readily admit that everyone should come up with their own number. There’s no right or wrong answer here.
What’s the best alternative for everyday spend?
It makes the most sense to use the Discover it Miles Card for everyday spend which wouldn’t otherwise qualify for a bonus category.
I’d argue the next option would be one of the following:
- Starwood Preferred Guest® Credit Card from American Express — I value the return for each dollar spent on this card at ~2.2%
- Barclaycard Arrival Plus™ World Elite Mastercard® — I value the return for each dollar spent on this card at ~2.1%
In other words, for everyday, non-bonused spend the incremental return of the Discover it Miles Card over one of the above cards is ~0.8%.
This isn’t a great card for people that are small spenders, in my opinion. That being said, if you spend a lot on credit cards, the value to be had from the card is potentially enormous.
For example, if you spend $100,000 on the card in a year you’d earn $3,000 cash-back. At best you’d otherwise be getting ~$2,200 of “return” on non-bonused spend through other cards. So that’s a difference of $800, and I think that’s well worth a credit card application, in my opinion.
Let me give another example. Say you pay a lot in taxes. There are websites that will let you pay your income tax by credit card for a convenience fee of ~1.87%. You could literally earn a ~1.13% return on your tax payment if you pay for it with the Discover it Miles Card.
The beauty of this hobby is how diverse the participants are. I get emails from blog readers that struggle with making $1,000 minimum spend over three months, and I get emails from blog readers that spend $1 million per month on credit cards (often for work or reimbursable items).
If you’re not a big spender then this card is marginally worth it at best, and I think there are probably better cards to be applying for.
But if you’re a huge credit card spender, then this has the potential to be one of the most lucrative credit card sign-up bonuses yet.
If I had to create a “threshold,” I’d say the card is worth it for the first year if you spend at least $50,000 on non-bonused spend. If you spend $100,000 it’s totally worth it. If you spend $500,000+, this might be the most lucrative credit card sign-up bonus you ever get.
What do you think? How big of a spender do you have to be for the Discover it Miles Card to be worth it?