Why Do Some Premium Credit Cards Offer Big Annual Credits?

In the interest of full disclosure, One Mile At A Time earns a referral bonus for anyone that’s approved through some of the below links. These are the best publicly available offers that we have found for each card. Please check out our advertiser policy for further details about the partners we work with. Thanks for your support!

Update: This offer for the Citi Prestige® Card is expired. Learn more about the current offer here.

Last night I posted about Chase officially confirming the details of the new Sapphire Reserve Card, which looks like it might be one of the most compelling credit cards we’ve ever seen. The card will offer triple points on dining and travel, meaning it’s 50% more rewarding in those categories than the Chase Sapphire Preferred® Card.

Reader Mike asked the following question in regards to the card:

Lucky, one thing I don’t understand is why the card has a $450 annual fee and $300 travel credit, which seems good as cash. Would they not get more people to sign up if they just made the annual fee $150? Since registration is not required to use the travel credit, I assume most cardmembers will use the credit.

It’s an interesting question, as American Express and Citi have similar airline credits on some of their cards.

Premium credit card “credits” keep getting better

It’s sort of interesting how the credits offered with premium credit cards keep getting better:

  • One of the first major cards with such a credit was The Platinum Card® from American Express, which offers a $200 annual airline fee credit. However, you have to nominate a specific airline for this benefit, and it’s only technically valid on fees, and not on airfare itself
  • Then the Citi Prestige® Card introduced a $250 annual airline credit. This doesn’t require registration, and any purchase coded by an airline qualifies for this card. It’s basically good as cash to most cardmembers
  • Now Chase is outdoing both American Express and Citi, both in terms of the amount and usefulness of the credit. They’ll be offering a $300 annual travel credit on the Sapphire Reserve Card. This will be valid on anything coded as a travel purchase, and registration won’t be required

Citi-Prestige-Airline-Credit

Presumably there are many cardmembers who don’t use the Amex Platinum Card’s $200 airline fee credit, though I imagine a vast majority of cardmembers use the benefit on the Citi Prestige Card. There should be even more people using the benefit on the Sapphire Reserve Card, since all travel is covered.

So, why the big credits and $450 annual fees?

I don’t think breakage in the credit is the credit card companies are charging $450 annual fees with big credits. Contrary to popular belief, I also don’t think Chase and Citi offer such big credits because they necessarily want you to put your travel purchases on those cards. The Citi Prestige Card offers triple points on airfare and hotels, while the Chase Sapphire Reserve Card will offer triple points on all airfare purchases.

Merchant fees for Mastercard and Visa are typically under 2%, so the rewards they’re issuing on those are greater than the fees they’re typically generating.

So, what’s the motivation? I suspect two factors, both of which are ultimately psychological:

Issuers don’t want to dilute their own card portfolio

The credit card companies want to be sure their card portfolio is differentiated enough so that they’re not diluting their existing products when adding new ones. For example, if the Chase Sapphire Preferred® Card had a $95 annual fee and Chase Sapphire Reserve Card had a $150 annual fee, it would likely create confusion among potential cardmembers. They’d also be going after very similar customer bases.

To give an example, American Express has two great mid-range cards for maximizing your points, including the Amex EveryDay® Preferred Credit Card ($95 annual fee) and the Premier Rewards Gold Card from American Express ($195 annual fee, waived the first year). The latter comes with a $100 annual airline fee credit, meaning the “out of pocket” is arguably the same on both cards, but they’ve created the sense that they’re very different because of the different annual fees.

Issuers design the mid-range ~$95 annual fee credit cards for the average consumer, while they’re going after higher income consumers with the ~$450 annual fee cards.

Issuers are going after high income individuals with premium cards

This is largely psychological, because a $450-550 annual fee card could make a lot of sense for someone who isn’t a high roller, especially with a $300 travel credit. However, by having a higher annual fee they’re inherently going after higher income consumers.

Many people are willing to pay a premium for something they perceive to be rare, and that’s how many people feel about high annual fee cards. Many people still think there’s some prestige associated with having an Amex Platinum Card, for example.

So by having a $450-550 annual fee, these premiums are going after higher end consumers who don’t mind paying for a card they may perceive to be prestigious or rare, regardless of whether or not that’s actually the case. They want these consumers since they’re also the people who will be spending the most on their credit cards.

At the same time, by having the airline credit they’re opening themselves up to people who are still looking for value.

Why do you think we’re seeing a trend where premium cards are offering progressively bigger annual credits?


Non-Affiliate Product Disclaimer: The information for the AmEx Everyday Preferred has been collected independently by One Mile At A Time. The card details on this page have not been reviewed or provided by the card issuer.

Regarding Comments: The comments on this page have not been provided, reviewed, approved or otherwise endorsed by any advertiser, and it is not an advertiser's responsibility to ensure posts and/or questions are answered.

Comments

  1. I hope Chase doesn’t go down Citi’s route eventually and realize that they now have surplus users than they require and reduce the signup bonuses like it happened for Citi Premiere and Citi Prestige

  2. I used to work for a major credit card company that offers a premium card that had an airline credit. Here’s the reasoning we used to use:
    -People who pay $400+ annual fees for a credit card tend to be very, very big spenders — orders of magnitude higher than other cards (even those with $50-$200 annual fees). Incentivizing their spend is extremely important.
    -A surprisingly large amount of people will never make the effort to actually use these credits intentionally. That is, if they haven’t spent all their credit by the end of the year, only what we call “gamers” will actually go buy gift cards or other products just to get the remaining value.
    -Travel spend among high spenders is also very, very high. Encouraging them to put their travel spend on this card is pretty critical. Let’s say this person buys 6 business class tickets a year on the card at a cost of $5,000 each. That means they’re going to spend $30,000 dollars on the card with an average discount rate (the amount the credit card company + network + banks make on the transactions) of 2%. That means there’s $600 of profit there — $200-$300 worth of credit still means everyone comes out on top. Especially for Amex, which doesn’t share their discount rate with Visa or an issuing/acquiring bank.
    -The general goal here (especially with the bonus points) is to train you to use and love the card. The greater share of your wallet (SOW) that the credit card company can acquire, the better. Travel, groceries, gas and dining are all areas that typically have good margins for the company and good habit-forming trends for the consumer. Not everyone — in fact, very few people — is as smart as Ben and the readers of this blog to optimize their spend across cards. And when you’re a high spender, it’s often not even important to you anyway.

  3. Are the any other premium cards that you have not noted here that also have fees and high rewards?

    Which ones?

  4. I recently got the Chase Sapphire Preferred card after one of Ben’s recent posts and am on track to get the bonus points (50k after $4k spend). I have only gotten 3 cards in the last 2 years and have pretty good credit so I think I should be approved for the Sapphire Reserve as well (which I will do once I hit the bonus spend).

    I am thinking of transferring the bonus spend UR (from my preferred card) to my reserve card once I get it and cancel the preferred asap. Can anyone please let me know if this will jeopardize the hard-earned bonus UR points? Thanks.

  5. I thought that was because the banks get the credits at a discount given the high volume they buy it at. If you’re buying $1M worth of AA credits, you sure are going to get them for $750K or less. They would do so with DL, UA, AS etc and give you a benefit for which you are “paying” 100% (at least psychologically, since you’re factoring that in the annual fee).

  6. @ Abdelrahim Abdallah — In theory it’s possible that Amex has some agreement since it’s specifically for airline fee credits. However, for the Citi Prestige it’s valid on any airfare, so I suspect they’re simply paying face value for whatever the purchases are.

  7. @ Credit — The only other one I can think of is the Ritz, but that works differently, as you manually have to request the credit. I imagine a lot of people don’t use that credit, so I suspect the math is a bit different.

  8. With the AA devaluation and now revenue based earning, it just makes so much more sense to pull my spending off my Citi AA cards and move the majority over to Chase. The 3x Reserve and 5x Freedom spend are too compelling to ignore.

    Still waiting to see if AA is going to add a credit card spend waiver for EQD in 2017. Thinking they will have a new card or re-launch an existing one coming from Citi and Barclay.

  9. “Issuers design the mid-range ~$95 annual fee credit cards for the average consumer, while they’re going after higher income consumers with the ~$450 annual fee cards.”

    Average people have trouble getting unsecured credit at all. I think by average what you mean is upper middle class but not top 1%.

  10. Lucky,

    Small fact check here on this:

    “Merchant fees for Mastercard and Visa are typically under 2%, so the rewards they’re issuing on those are greater than the fees they’re typically generating”

    Have a look at this document from VISA:

    https://usa.visa.com/dam/VCOM/download/merchants/visa-usa-interchange-reimbursement-fees-2016-april.pdf specifically page 8

    Depending upon whether or not the spending has been qualified the IC rate to the bank is 2.30 or 2.40%.

    Mastercard has similar rates for it’s World Elite product (which is the anchor for the Prestige Card).

  11. I don’t know if the numbers make sense or any legal issues but essentially we’re giving issuers an interest free loan. I give chase $450 and anytime in 12 months they might have to pay up to $300 back. Lets say they end up with half a million card holders who, on average, use the credit 6 months after paying the fee. Suddenly you have 150 million dollar loan, interest free, for 6 months.

    I’m not in finance so this is probably 100% BS but we’re just prepaying a travel expense.

  12. Lucky –
    I’m curious: if one were to get the Chase Sapphire Reserve card, would there be a rationale for retaining and using a Chase Sapphire Preferred card long term? Or would it be better to transfer the UR points to the Reserve and simply cancel the Preferred, since the points earning is better with Reserve?

    Thanks!

  13. @Mike – you are right. In my previous line of work, I did a lot of B2C online credit card processing and the fees we paid on interchange for premium cards were substantially higher than debit cards and lower end credit cards. This was also back when AMEX was simply painful to accept. We used to generate online transactions in the hundreds of dollars so paying AMEX 100 – 200 bps more wasn’t worth it. Everyone with an AMEX has another card anyway.

  14. As another person noted, the main reason is simply that many people will never actually redeem the credit so they can calculate and average amount that they’re generating per cardholder by annual fees+interchange+interest-the benefits of the card (including the average amount of the airline credit used)-defaults (which are presumably lower on these types of cards).

  15. I covered the banking industry for a long time as an equity analyst. Here is the math they are doing in the executive office that folks may be missing:
    1) Somewhere between 20-40% of people won’t be paying attention and won’t actually use any or all of the $300 credit.
    2) While paying a person 3 points (worth 2 cents a point) for every dollar spent may seem like a money losing proposition of paying out 6% benefits while only collecting 2% interchange fees, the people that will extract that full value from points are a very small population. (and hence the reason they are trying to scare away churners who are savvy). There are large percentages of points that expire unredeemed as well as a large population of people who redeem the points for poor redemption values.
    3) The travel hacking community seems to think the money the banks make from credit cards is in the interchange fees….it is not. The banks are in the credit card game for the lending revenue. While none of us savvy hackers are carrying balances (because it would make no sense to pay 20% interest to earn rewards worth 6%) we are in the tiny tiny minority. 80% of the banks credit card revenue is from interest income.

  16. @Rob: Very interesting, thanks. Do you have any data on the percentage of all U.S. credit card holders who routinely carry balances? On a related note, I’m pretty curious to know what percentage are gamers/hackers/churners/whatever you want to call them, and how that percentage has grown over the last several years (assuming it has, in fact, grown).

  17. Honestly I will be dropping my Amex plat for this on everday spend. Seems like the plat card has lost any level of “specialness”. Probably going CSPR and Prestige(4th night is killer too me. Have used it about 7-8 times this year). That combined with the fact that visa is just accepted much more commonly than Amex makes it a slam dunk. At least till chase adjusts earnings or bonuses.

  18. That above is said as a 150k a year spender on Amex and have been keeping travel ~50k on prestige. If I can earn points worth roughly 1.6x the value of MR plus bonuses. Plus a better program it really makes
    Me wonder how Amex is going to keep business.

  19. @Rob S

    I highly doubt credit card companies make a substantial amount of their income from credit card interest. Almost nobody carries a balance on their credit cards, and not one person I have encountered gets a credit card to carry a balance unless it is like a 0% APR or something. The majority of the CC companies revenue is from interchange merchant fees and annual fees.

  20. Financial planner checking in. Almost everyone I have on my books, high net worth or otherwise, has carried a balance at some point in the last 3 years. It’s definitely where they’re making money.

  21. @kevin

    Average us household has 15k in credit card debt. With daily compounding interest please tell us again that banks don’t make majority of their money from interest.

  22. Does anyone know how this credit works? Do you have to spend $300 at once? If you spend 150 is the other $150 gone, or can you use it another time?

  23. Kevin C, you have no clue how the world works. The points hobbyists don’t carry balances but we are a VERY small portion of the population, A LOT of the everyday people in this country carry credit card debt, lots of it at 20-30% interest.

  24. @Kevin ha ha !!!!! You are either most clueless or best troll of the day. Either way u win – congrats !!!

  25. I am prefacing this comment by saying that it is directed toward frequent travelers, not the hacker that cashes points in once in a while. If you are a frequent traveler, why would you value this card ( once the bonus is gone) over a prestige or Amex platinum? The prestige has has a $250 credit vs. the chase $300, but the prestige surpasses it with the hotel bonus. The Amex platinum offers a premium companion ticket for international flights, which probably outshines the other two. I would think that the savvy traveler would want all three in their portfolio.

  26. @Kevin – I think you are mistaken. I.e., I run a small antiques business. Most of my purchases come from auction sites far away from my home. I must use credit cards to purchase my inventory for resale. The interest is simply part of my overhead. I constantly carry debt because of this, and Chase, Amex, and Citibank love me for it. And I love their points. You have no idea what you are talking about. The world depends on debt and credit. Without credit and debt, Wall St. Would collapse.

  27. @Rob S: Thanks so much for posting that interesting information. I knew the banks had to be benefiting somehow from all their seemingly incredible offers.

  28. This is indeed a valid point. In economics we like to talk about signalling, i.e. how to identify people’s willingness to pay via a low-cost means. In this case, people who are willing / indifferent to pay the high annual fees are usually those who earn more (let’s put churners aside here), so high annual fees is acting like a filter here.

  29. @Jonathan: Over the past 20 years, for Personal cards 35-50% of people typically carry a balance from month to month depending on the strength of the economy and usually about half of small business cardholders carry balances regularly. Those are the folks known as “revolvers” they are the prize the banks are competing for. But even the “transactors” who usually pay their balances every month usually pay the bank some interest at some point during the year. The percentage of cardholders that manage to actively use their card and manage to not pay any interest in a year is small. As for the percentage of hackers/churners I don’t have any data on that but I would estimate it is less than 2% due to the intelligence/sophistication/financial resources required.

    @Kevin C: You can doubt it, but it really is not a matter of debate that net interest income is and has always been the driver of credit card company revenue and earnings. I used to caution my clients not to base their conclusions on the behaviors of the people they know because whether you realize it or not, the universe of “people you have encountered” is a skewed group that is not representative of a random sample of people. I would bet if you lived in inner city Detroit, you would not be able to make the same comment that “not one person I have encountered gets a credit card to carry a balance”. We would call testimony like yours, “anecdotal evidence.” Which is code for “information serious people ignore.”

  30. @Chris Jensen: ” If you are a frequent traveler, why would you value this card ( once the bonus is gone) over a prestige or Amex platinum? The prestige has has a $250 credit vs. the chase $300, but the prestige surpasses it with the hotel bonus. The Amex platinum offers a premium companion ticket for international flights, which probably outshines the other two”

    1. Many business travelers have their hotel stays comped or paid for by their company, so they get essentially zero benefit from the 4th night free Prestige perk. Of course, if they stay 4 nights for business, pay for it with the Prestige, get comped for 4 nights and for 1 night from Citi, that’s a net benefit – but The Citi Prestige hotel benefit is a huge PITA to use because you can’t just book online. You have to call, wait for them to call back, etc etc. Busy business travelers don’t have time for that BS.

    2. Companion tickets are nice, but not always useful. When I travel on business and my wife/family tags along, it’s not much fun because I’m trying to work and they’re trying to play. I’m not sure I’d pay expensive annual fees for this perk.

  31. @Jonathan: “Do you have any data on the percentage of all U.S. credit card holders who routinely carry balances?”

    http://lmgtfy.com/?q=+percentage+of+all+U.S.+credit+card+holders+who+routinely+carry+balances

    (Answer: 34% in 2014, down from 44% in 2009)

    “On a related note, I’m pretty curious to know what percentage are gamers/hackers/churners/whatever you want to call them”

    Now that’s a question you can’t answer with Google, as it’s proprietary information. I’m sure there are more gamers now than 5 or 10 years ago, and I’m also pretty sure it’s starting to make a significant dent in the banks’ bottom line. Think about it: this is an industry that is willing to write off *billions* in fraud losses, but they are fighting tooth and nail against churning. So they are clearly worried about it.

  32. After a number of years churning and having multiple credit cards with different banks,I had the unintended consequence of building up a line of credit well into the 6 figures.

    I tapped into my credit for a business venture. It turned out profitable, I did pay interest for months, but that was built into my ROI. After that I have received many 0% balance transfers, which I have taken advantage of, paying the 1% to 3% fees, It was easier and more flexible than a bank loan. So yes, even gamers pay interest and fees. Fortunately it has been profitable for me, even after paying credit card fees.

  33. @Chris Jensen:

    1. The Amex companion ticket is hard to get real value out of. It requires purchasing a refundable ticket in international first or business class, and these tickets tend to be very expensive. With all of the discounting going on in first and business class in an attempt to fill them with revenue passengers rather than award fliers or upgraded elites, it’s very likely that it would be cheaper to buy two discount tickets rather than a single full-fare refundable ticket + a discounted companion ticket. Especially given that taxes and fees, including fuel surcharges, are not covered and fuel and passenger surcharges may very well make up the majority of the ticket price. And you have to call up Amex to get it booked, which is a hassle. Thus, at the end of the day, it’s very rare to get very much real value out of the companion ticket, which is one of the reasons it’s probably the least-discussed Amex Platinum perk in frequent flier circles. Amex Platinum also has by far the worst earning rate for actual spend.

    2. Citi Prestige is tougher competition as the 4th night benefit is useful, but only if you regularly stay in 4+ night intervals. Many business travelers will likely not meet this threshold for most of their trips, and it isn’t hugely useful to, say, the casual traveler jetting off to Vegas for the weekend. It has better earning than the Amex Platinum but worse than the Sapphire Reserve, as the Sapphire has 3x earning on travel + restaurants while Prestige has 3x only on airfare and hotels, as dining only gets 2x. Chase also has better transfer partners than Citi right now, as Citi doesn’t have any US air carriers as partners whereas Chase has two (United and Southwest) and Hyatt has a better rewards program than Hilton.

    Depending on travel habits, arguments can be made to get all three cards. Neither Citi nor Chase can give access to Amex lounges (of course), and I’ve personally also gotten a lot of mileage out of the Amex Boingo plan when traveling internationally. The rental car benefits are nice as well. The Sapphire Reserve is the best one for ongoing spending thanks to its big 3x category and strong transfer partners. And the Citi 4th night benefit has real value even if it can be a hassle to use. Ultimately though, at this point Amex Platinum is starting to get left behind in terms of “flashy” benefits like multiplier categories and free nights. It’s still a strong card if you know how to use it, but there’s a lot of innovation in the market right now and Amex isn’t alone in the premium travel card market anymore.

  34. Don’t forget in all this how the AmEx Platinum got this benefit. It happened right after the Continental/UA merger, when Chase forced the break-up of the AmEx/Continental relationship. Platinum cardholders ended up losing access to Continental (by then United) lounges, which was a huge benefit hit to CO/Skyteam loyalists. The $200 airline credit was sort of a “we’re sorry you can’t use those lounges anymore” bonus, the idea being you could use that $200 to buy day passes here and there. Since then, it’s become a standard offering on all these types of cards.

  35. Wow so much backfire for a random comment I said. I honestly didn’t do any research. But I still think it makes no sense that CC companies make the most revenue off that penalty interest 16-30% or something. It’s like saying a city makes the bulk of its revenue from fines and traffic tickets.

    More likely than not CC companies make the most money off interchange fees. Billions of dollars a day are processed everywhere and 2-3% of all that drives their machine. Annual fees are also a big source of their revenue as well. I have exceptional relationships with the issuers and I have never paid those APR% or fees to make them “profitable”.

    And paying 16-30% interest is insanity. Most people would go the balance transfer or 0% APR that a BUNCH of cards offer: Discover, Freedom, AMEX EVERYDAY, etc. if they were to carry a balance I would assume they would take out one of those small loans (or small business loans) that the SAME credit card issuers flood your mailbox with “Get $30,000 NOW”, “consolidate your debt” blah blah blah. Even with those loans it is at 5-6% far less than the CC….

  36. @Kevin C – “I honestly didn’t do any research.”

    That was made obvious when people with experience in business and the credit card industry told you that you were wrong.

    “But I still think it makes no sense that CC companies make the most revenue off that penalty interest 16-30% or something.”

    Doesn’t matter if it makes sense or not, it’s true.

    “More likely than not CC companies make the most money off interchange fees.”

    You admit you didn’t do any research, and you continue to make assertions that people with experience in the credit card/finance industry and people who use credit cards for their businesses have proven wrong.

  37. Give it up, Kevin. Do you not understand what the word “credit” means? There’s a reason why it’s called a *credit* card. And it is well known that banks make most of their credit card business money from interest. In fact, they make most of their money from interest, period. But maybe you’ve also forgotten that banks’ primary business is lending.

  38. @Kevin: “Most people” who carry a balance *do not* research credit cards. If these people were financially savvy, they wouldn’t be carrying balances, period. Also, by the time these people have racked up a few thousand on their cards, their credit scores have tanked and no one’s willing to lend to them. Certainly no one’s going to be extending a 0% APR to someone who might not pay them back.

    Look at it this way:
    Person A is carrying a $10k balance on a 16% APR card: They’re paying $133/mo in interest. That goes up to $233/mo @ 28% interest. $1,600-$2,800 profit off the poor bastard every year.

    Person B pays their sh*t on time and carries no balance. They run up about $2k/mo in charges. At best they’re getting $40/mo from this person. $480 profit off this loser per year.

    BUT Person B is also less profitable because they’re more likely to use the card benefits (travel points redemption, airport lounges, travel credits, various travel / product insurances included with the card) since they obviously aren’t in debt like Person A is.

Leave a Reply

Your email address will not be published. Required fields are marked *