On last week’s Milenomics² Podcast we tackled the following question:
My friends frequently use co-branded cards like Marriott, United, and AA for all their spend, including restaurants. Help me convince them that they would be significantly better off with a different credit card strategy?
I started off talking about how co-branded cards are a bit of a paradox. They’re a paradox in that you’d think that if you like a certain entity that it would make sense to earn rewards that can be redeemed with that brand. But compared to other options, co-branded cards are rarely good for spending outside of their bonused categories. Sometimes they’re not even the best option for earning rewards that can redeemed with the brand.
The Freequent-Flyer extended the discussion on this topic brilliantly.
For a better credit card strategy I recommended carrying multiple cards within a flexible bank point system. Although some might not want the hassle that comes with “juggling” multiple cards, I think the upside is worth it.
I say this not just because you can optimize which credit card you use depending on the category you’re spending in. But more so because when you can earn rewards in one scheme, then redeem them in another thanks to co-mingling.
When banks design a credit card, they think of its profitability as used by a pure transactor. They anticipate that the volume and categories the card will be used for will roughly align with typical household spend.
Co-branded cards tend to bonus spend at the brand they’re affiliated with, along with a couple other loosely related categories that people think they spend of lot of money on but in reality comprise a rather small portion of a consumer’s overall spend.
When the mix of overall spend is considered the card remains profitable for the bank since much of the spend is not bonused. Add in annual fees, interest, and other fees and you see why we actually want as many people as possible using their credit cards poorly. Because it’s on the backs of these consumers and businesses that we’re able to be rewarded for optimizing our credit card portfolios.
A step beyond a pure transactor is an optimizing transactor. This is someone who switches up the credit card they used depending on the category they’re spending in.
If a consumer is skilled in their optimization they can improve the overall rewards as a percentage of their spend. But thanks to annual fees on cards that most handsomely bonus categorical spend, sub-par award redemptions, and the inevitable breakage that occurs for card benefits – banks are still profitable even with an optimizing transactor.
Co-Mingling Credit Card Rewards
If you’re categorically optimizing your spend across several cards within a flexible point system, most banks allow you to co-mingle the rewards and redeem them according to the best redemption schemes available in the program.
Take for example the Amex Gold card that earns 4x at grocery stores. If you also carry the Amex Business Platinum card your rewards are co-mingled and you can redeem them for flights with 1.5 cents per point of uplift.
I show in this post how you can sometimes get close to 2 cents per point of value when redeeming for flights that earn miles with Amex. That makes your grocery spend worth almost 8% cashback.
Similarly if you’re invested in the Chase Ultimate Rewards program you can earn 5x in rotating categories on the Freedom card, then redeem them with 1.5 cents per point of uplift towards any travel bookable through the Chase portal. That’s 7.5% back on your spending in those categories.
Some banks allow you to co-mingle between spouses (Chase, Citi). Others allow you so share points with anyone (Wells Fargo is a good example of this).
If we take an optimizing transactor and stack the ability to co-mingle points towards effective high value redemptions – we’ve really got something. We’ve got a reward scheme that works better for us than the banks.
If a high enough percentage of users maximize these opportunities it becomes unprofitable for banks. Fortunately, a large amount of the credit card user base doesn’t take advantage of co-mingling. Many people like two things in a credit card rewards program: No annual fees, and cashback.
That said, I wouldn’t be surprised if a major bank eliminated the ability to co-mingle rewards in the near future, and others followed suit. For that reason I’d encourage anyone who isn’t already doing so already to optimize their transactions and co-mingle their rewards effectively. Because when the opportunity is gone you’ll wish you had.
A Milenomic Approach to Rewards
Some say they don’t have time for all this. That they don’t want to juggle cards, they don’t want to pay annual fees, and they don’t want to be frustrated by ever-changing bank policies.
And that’s fine. To that audience I’d recommend taking a look every year or two to make sure the card you’re using is as rewarding as possible.
Here at Milenomics we like to push the limits of what’s possible with rewards. We’ll take on annual fee credit cards if we can eradicate those fees with effective use of card benefits. We’ll optimize the heck out of categories. And we’ll work to take exactly the trips we want to take for the least amount of money possible.
If this is the kind of thing you’re into you might like the paid version of our podcast:
We’ve had a blast creating it, and the interaction we’ve seen between listeners has been outstanding.